What is the Gold Standard?

What is the Gold Standard?
Table Content
What is the gold standard?
What was the gold standard, and why did it collapse?
When did the US abandon the gold standard?
What countries are on the gold standard today?
What replaced the gold standard?
Bottom line

Gold is a precious metal that has fuelled economic growth for thousands of years. Initially, gold trade was rudimentary and restricted to physical gold. But as humanity evolved, more avenues of trading gold started to materialize. Today, in the 21st century, trading gold is a multi-billion dollar asset class with many avenues. It can be a store of value or an expensive bracelet on Kim Kardashian’s wrist. Let’s dive a little deeper.

What is the gold standard?

The gold standard was derived from how much physical gold underpinned a country's centralized currency. While this method is dated in Western economies and was abandoned by large economies like the US nearly 100 years ago, it remained the bedrock of the international monetary system until about the early 1970s.

Much debate and criticism were leveled at the gold standard when the US discontinued the idea of it being an effective store of value. Although gold is still a highly traded commodity, it’s traded on forex markets in its physical form, and also via other instruments like ETFs. If a country implements the gold standard, the central authority agrees to a specified price for gold and trades it at that amount.

Today we’ll look at how the gold standard first came into fruition, how it rose to prominence and the variables that caused it to shrink into obscurity. It has now been replaced with fiat money issued by a central government for that territory or sovereign nation.

What was the gold standard, and why did it collapse?

The overriding factor that caused the collapse of the gold standard was the volatile economic policies implemented by large world economies between the early 20th century and just after World War One ended.

In the years that preceded the First World War, the classical gold standard facilitated commerce between nations. Using this methodology, international trading was verified and authorized using physical gold. Countries that used this method would amass the precious metal and build a surplus, allowing them greater trading power when buying and selling products internationally. On the contrary, countries that built up a deficit would have lower gold stockpiles as they used the gold to pay for products flowing into their economy.

One of the great things about the gold standard was that measuring the currency against a fixed commodity, and bringing down inflation was a positive measure. It helped control totalitarian tendencies and the distribution of a country's currency.

However, this was due to economic policy from central banks within these countries, which caused wild fluctuations and volatility within these markets. Many economists have highlighted that the gold standard failed because of these policies.

When did the US abandon the gold standard?

The UK abandoned the gold standard in 1931. The US abandoned it in 1933. However, it wasn't a complete abandonment of the system. Some aspects remained in the US economy until Richard Nixon's administration completely removed them in 1971.

It was removed from the economic system so that the American government could help curb inflation and in a bid to stop other nations from using dollars to cash their gold reserves. The Bretton Woods agreement ratified this legislation and allowed the US Dollar to become the dominant reserve currency.

Physical gold is still a large industry, and even though it was depegged from the dollar in 1971, it has thrived as a reliable hedge against inflation. It can also be traded as a foreign currency pair. You can use mobile trading apps such as amana to trade a range of commodities and assets such as stocks and cryptocurrency. Gold is still highly sought after for physical investments, such as rings, necklaces and jewelry, which can appreciate in value over time.

What countries are on the gold standard today?

No country uses the gold standard anymore. Once large western economies such as the UK and the US began to move away from the gold standard, other countries followed suit.

As discussed in the previous section, the US fully removed itself from any form of the gold standard in the early 1970s. Switzerland was the last country to abandon the gold standard just before the turn of the 21st century in 1999. Better late than never!

Just because countries no longer use the gold standard, it doesn't mean they do not hold gold in any form. As we have discussed, gold is a highly lucrative commodity market. Many countries have large amounts of gold to hedge against inflation effectively. The US has the highest amount of gold, believed to be over 8,000 tons worth, locked in vaults in major banks throughout the country.

What replaced the gold standard?

As we touched on earlier in the article, the gold standard was replaced by fiat currency. This is the model that sovereign nations use today, and it is a method that has helped develop many countries into economic superpowers. Fiat money means that governments pass legislation that ensures the printed money and the agreed currency facilitated by the central bank is used as the only valid method of currency within their borders.

Bottom line

Even though the gold standard was a highly respected policy that appeared to provide clarity and fairness across a range of international markets, as the world began to evolve and economic policy became more complex, it became unfit for purpose.

Some analysts still argue that the gold standard was a fairer way to establish the true value of a country's currency as economies measured it against their net exports and their ability to trade the goods they had to offer. Now that the power to print and control currency is completely autonomous, it has created a host of other discussions for economists and legislators to ponder.

In any event, gold will remain a key feature of the financial market. Although it may not have the power it used to have, it would not be easy to imagine a financial system where gold is not implemented in some capacity.

Share article
bg
google
apple
eth
bitcoin
eur
tesla
Connecting communities through education
app
app