Tuesday, October 11, 2011

The Gold Standard

Gold is a metal that is found naturally in nature and has long been revered and worshiped by humans as a symbol of wealth and power. It has been at the root of many wars and has also been a leading reason for colonial expansion. It has also been used as a monetary system throughout history. This is referred to as the gold standard.

In a country that uses the gold standard, its governmental 'paper' notes are backed by gold and can be freely converted into a fixed amount of gold. Before the gold standard came into use the gold-coin standard was used. In the gold-coin standard, government minted gold coins that were used to pay taxes and other fees. The first known example of the gold-coin standards came late in the 7th BC in ancient Lydia. Greece introduced a gold-coin standard shortly after Lydia, which then quickly spread throughout Rome and the rest of the world.

It was not until the 17th and 18th century that countries began moving away from gold coins and began creating government notes that were backed by gold. The United States adopted the gold standard in 1792 with the passing of the Mint Act. A dollar was valued at 24.75 grains of gold. Until that time paper script had been used, but was not of much value.

The United States dollar was backed by gold until 1862, when paper money was issued without the backing of gold or silver. This continued until 1878 when the gold standard was reintroduced. Similar actions were briefly taken during the War of 1812. The United States continued to switch between the Gold Standard and Fiat money system until 1971.

The fiat money system involves in some respects arbitrarily printing money that has no real value. It was commonly adopted in times of war and struggle so that the gold could be used to fund wars and in some cases the imbalances created lead to conflict. The United States is in no way alone in this practice and in 1971, for the first time in history, no countries were using a gold standard.

There are advantages and disadvantages of using a gold standard. Government printed script backed by a gold reserve, provides the government with a large amount of control and allows for the control of trade. This was in large part the reason that countries moved away from the gold-coin standard in place of the gold-standard. One advantage to this system though is that because the money is backed by gold, it is largely impervious to governmental tinkering that can cause depressions or boom cycles. Since you can not create gold arbitrarily, the amount of gold in production is limited and it is difficult to correct or create inflation, but a increase or decrease in the amount of gold available can occur. In cases where there are increases or decreases in the amount gold inflation can be created.

Today gold is frequently used in jewelry, which tends to hold and increase in value. Its uses in religious settings and relationships are well known, and there are many types of jewelry available.

1 comment:

  1. U.S. Gold Coins

    US gold coins are some of the best ways to own gold. They are available in a variety of types and offer a wide array of benefits.

    The first thing to understand is that there are two broad categories of U.S. gold coins: Gold bullion coins and Numismatic gold coins.


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