The Gold Standard ($, AUD)

Published: 01/05/2016 - Updated: 16/06/2016 - Category: Currency

The gold standard is a method of currency valuation in which either a part or the whole of a country's money is backed by a specified amount of gold. The gold standard has traditionally come in three forms known as the gold specie standard, the gold bullion standard and the gold exchange standard.

The gold specie standard involves the circulation of gold coins that can be accepted as legal tender. The value of these gold coins is determined by the gold they are made of. Under this system, gold coins are used in addition to other coins of lesser value.

In the gold bullion standard, while the issuing government does create in fact create gold coins they do not circulate. Instead, the government agrees to sell gold bullion coins at a fixed rate in exchange for the legal tender of that nation. Under the gold bullion standard, the currency has value because it can be exchanged for gold.

The gold exchange standard on the other hand does not involve gold coins at all. Instead, the issuing government promises that its currency can be exchanged at a fixed rate for another currency that is backed by either the gold specie or bullion standard.

History of Gold as Currency

While gold has long been considered a valuable commodity and used in trade throughout human history, the first gold exchange standard appeared in the British West Indies in 1704. It was at this time that Queen Anne of Great Britain made a proclamation that the island's currency could be exchanged for Spanish Doubloons that were made of gold.

A little longer than a decade after the proclamation of Queen Anne, the United Kingdom would make an important change of its own. In the year 1717, Sir Isaac Newton, the head of the national mint, would alter the ratio between silver and gold in the Pound so significantly that the United Kingdom essentially moved to the gold standard. The British would adopt this standard officially in 1821 when the old gold sovereign coin was produced as a bullion. The value of these coins were roughly one Pound.

Other currencies such as the US Dollar and Japanese Yen would adopt a gold bullion standards during the nineteenth century only to have their currencies rocked by a world war and a global recession in the 1930s. Many currencies would leave the gold standard at this time.

Today, many governments issue fiat money, a currency that holds a value due to the fact that it has been declared legal tender. With the gold standard being largely eliminated from today's economic environment, the valuation of currencies has become increasingly complicated and based more on other economic factors.