During the current recession, different theories have been put forward to suggest the decline of the US economy. Some researchers attributed abandoning of the gold standard as one of the factors for economic instability. Since then, a lot of people want to know what this stands for.
Although it is no longer in use today, the influence that it had on the world economy cannot be neglected. It is a system in which the monetary unit of a country is expressed as a fixed weight of gold. There was an agreement by several countries that they would value their currencies in such a way that it could buy the exact amount of gold that they held.
For example, if a country had X units of gold reserves, then it could mint only a specific amount of currency equivalent to the value of those units. The Gold Standard Act was passed in 1900 and it established the metal as a monetary exchange all over the world.
Richard Nixon ended the convertibility of currency into gold some 40 years ago, and today the measure is known as the 'Nixon Shock'. A lot of thinkers, to this date, are critical of this decision and question his legal right to end this system. Today, most of the economies work on the floating exchange system.
Since the historic times, gold was always looked upon as a precious metal and people were well aware of its properties. It was used as a form of currency by various civilizations, but with time, some changes were made to the way it was exchanged.
Gold Specie Standard
This monetary system is one of the oldest in the world. It was based on the actual gold coins of different denominations. In the US, it was adopted in 1873, with the American Gold Eagle as its unit. Gold coins were available in various denominations namely USD 50, USD 25, USD 10, and USD 5.
Gold Exchange Standard
In this type of monetary system, the currency used was not made up of gold, but it had a value equivalent to that of the metal. It was widely used in the late 19th century, and continued till the beginning of the 20th century.
In this system, coins made of silver and other metals were used in circulation, but the government guaranteed an exchange rate that was equivalent to the value of gold coins.
Gold Bullion Standard
This was the final standard that was used before the gold standard was completely abandoned. In this system, the government started selling gold bullion on demand at a fixed price. International trade caused a lot of bullion to be shipped out of countries like Britain, France, etc., and this standard was also abandoned by the 1930s.
The Gold Standard Act
The Gold Standard Act was approved on March 14, 1900, when the metal was declared to be the standard for redeeming paper money. It had taken around 25 years for the US government to choose between the value of silver and gold.
It also set a value for the metal where 1 troy ounce was equivalent to USD 20.67. (one troy ounce is equivalent to 31.1034768 grams) The act was dissolved in 1933 with the adoption of the Gold Reserve Act, which stopped the use of the metal as a standard for currencies.
Today, most of the economies work on floating or fiat money. Adopting the gold standard again seems very difficult as the metal is found only in select parts of the world, and no country has the gold reserves for the amount of currencies they generate.
An unstable US dollar is a concern for many countries, and many economists are of the opinion that there should be a monetary system in which a precious metal is linked to the currency of a country.