Tuesday, October 11, 2011

The Gold Standard: Three Definitions

What exactly is the "gold standard?" This term refers to a system in which all forms of legal tender are based against a weight of gold. This type of monetary system uses a fixed price of gold as a comparison for currency and bank deposits. There are three different types of gold standard systems that have been used since the 18th century, which include gold specie standard, gold exchange standard and gold bullion standard. Each is slightly different and has played a different role in history.

1. The Gold Exchange Standard

With this monetary system, the less precious metal coins are used as the standard. These metals include silver. Those implementing the system have usually decided upon the exact exchange rate with any country using gold standard. Before 1900, any countries that were using silver standard began switching their currency units to the gold standard that was being used in the United States or the UK. Examples of countries that made this change include the Philippines, Japan and Mexico, who each valued their silver currency units as 50 cents per US dollar.

2. The Gold Bullion Standard

The most common form of gold standard is the one based on the price of bullion that is based on worldwide demand. Since 1925, this method has been commonly used, as the British Parliament declared the gold specie standard to be void. Because of the large volume of bullion that was shipped out of the UK after that, this gold standard was ended as well. Countries that use gold standard are somewhat insulated against having governmental inflation of prices because of excesses in paper currency. When the exchange rates are fixed, then international trade is more certain and more fair.

3. The Gold Specie Standard

This type of gold standard is related to the actual gold coins circulating worldwide. Each monetary or currency unit is based on the actual denominational value of one denomination of gold coin. Gold coins that are made from other metals mixed with gold are also considered.

Since the medieval empires, the gold specie standard has been commonly used, though not always formally recognized. The British West Indies use this system in their modern currency based on the Spanish doubloon coin. In the United States, the gold specie standard was adopted in 1873, with the Gold Eagle coin as its unit.

Unfortunately, the gold standard can sometimes affect monetary systems and policies and make them less effective when any attempt to stabilize an economy is made due to recession or slowing of economical systems. When the amount of gold determines the amount of money in the world, then the gold standard can affect international economies adversely.

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