Gold standard


    The gold standard is an international monetary system that enables a government of any country to fix the exchange rate between the country’s currency and the per ounce price of gold.

    The exchange rate between the domestic currency and the other currency in the currency pair is then determined by the difference of the price per ounce of gold between them.

    Advantages and disadvantages

    Apart from the fixing of exchange rates, adoption of the gold standard ensures the long-term stability of prices, helping keep inflation under control as governments can’t then inject vast quantities of bank notes into the economy to boost the money supply. A side effect of that is that it suppresses deficit spending by governments, meaning there are unlikely to be negative consequences for the economy, such too-low interests rates or falling GDP.

    One of the major disadvantages is that gold-producing countries such as Australia, Russia, China and the U.S. have more economic power than non-gold producing countries as their reserves are larger. The gold standard can restrict economic growth because when paper money is backed by it, it stops a government from boosting the money supply, which means capital can be injected to maintain growth in productive times. Likewise in times of recession, economists believe increasing the money supply can provide struggling companies with much needed capital and consumers with more spending power.

    Alongside long-term price stability, the gold standard has also been linked to short-term extreme price volatility which causes uncertainty over the value of debt for banks and other lenders or borrowers.

    The silver standard

    The silver standard is an alternative to the gold standard, which fixes exchange rates to the price of an ounce of silver. It was the chief monetary system based on a precious metal for centuries, until the gold standard was adopted in the late 19th century.

    Silver has enjoyed brief periods of favour, particularly when countries have reduced the silver content of their coinage in order to boost their silver reserves. However, it has never again enjoyed its high relative value to gold — the silver to gold ratio is relatively stable today at around 50:1.

    Further reading

    Wikipedia article on the gold standard
    Wikipedia article on the silver standard