Ask the Gold and Silver Chick! What Was The Gold Standard?

June 16th, 2011 by

Hi everyone,

Welcome to a new week and a new edition of Ask the Gold and Silver Chick. Thanks for joining me!

I saw this week’s question about the gold standard on Gainesville Coins’ Facebook page, and wanted to answer it on our blog. Here’s what one of our fans asked:

“Who makes the value of gold valuable? Gold was great for jewelry, electronics and other goods, but with advances in technology and gold not used in these goods nowhere near as much as it used to be, who makes gold, the Gold Standard??”

Great question! Let’s explore this further…

My normally extensive Economics Glossary does not have an entry on the gold standard, so we’ll have to look elsewhere for a definition. An extensive essay on the gold standard in The Encyclopedia of Economics and Liberty defines the gold standard as “a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price.” A county under the gold standard would set a price for gold, say $100 an ounce, and would buy and sell gold at that price. This effectively sets a value for the currency; in our fictional example $1 would be worth 1/100th of an ounce of gold. Other precious metals could be used to set a monetary standard; silver standards were common in the 1800s. A combination of the gold and silver standard is known as bimetallism.

A Very Brief History of the Gold Standard

If you would like to learn about the history of money in detail, there is an excellent site called A Comparative Chronology of Money which details the important places and dates in monetary history. During most of the 1800s the United States had a bimetallic system of money; however it was essentially on a gold standard, as very little silver was traded. A true gold standard came to fruition in 1900 with the passage of the Gold Standard Act. The gold standard effectively came to an end in 1933 when President Franklin D. Roosevelt outlawed private gold ownership (except for the purposes of jewelry). The Bretton Woods System, enacted in 1946, created a system of fixed exchange rates that allowed governments to sell their gold to the United States treasury at the price of $35/ounce. “The Bretton Woods system ended on August 15, 1971, when President Richard Nixon ended trading of gold at the fixed price of $35/ounce. At that point for the first time in history, formal links between the major world currencies and real commodities were severed.” The gold standard has not been used in any major economy since that time.

What Do We Use Today?

Almost every country, including the United States, is on a system of fiat money, which the glossary defines as “money that is intrinsically useless; is used only as a medium of exchange.” We saw in the article “Why Does Money Have Value” that the value of money is set by the supply and demand for money and the supply and demand for other goods and services in the economy. The prices for those goods and services, including gold and silver, are allowed to fluctuate based on market forces.

Hope that helps, and thanks for the question!

Until next time,
The Gold n Silver Chick