Gold Standard
A gold standard is a monetary system in which a currency is defined as a fixed weight of gold and the issuer promises to convert its notes or deposits into gold at that price, tying the supply of money to the stock of gold.
Also called: classical gold standard · gold exchange standard · gold convertibility · gold-backed currency
Under a full gold standard, the central bank or treasury stands ready to buy and sell gold at a fixed price in its own currency. Because each participating currency is fixed to gold, the currencies are also fixed to one another, and exchange rates can move only within the narrow range set by the cost of shipping gold between financial centres. The classical version operated among the major economies from the late nineteenth century until the First World War. Britain, its centre, returned to gold in 1925 and left again on 21 September 1931, after a run on sterling drained the Bank of England's reserves.
The Bretton Woods system that followed the Second World War was a diluted form, usually called a gold exchange standard. Other currencies were pegged to the US dollar, and the dollar alone was convertible into gold, and only for foreign official holders. In August 1971 the United States closed the gold window, foreign governments could no longer exchange their dollars for gold, and within a few years the major currencies were on a floating exchange rate.
The discipline of the system is also its cost. A country on gold cannot expand the money supply freely to fight a recession or a banking panic, and a shortage of gold spreads deflation from one country to the next. Convertibility at a fixed price holds only while holders believe the issuer has enough metal; once they doubt it, they all ask at once. That run dynamic is the same one that tests a currency peg or a redeemable stablecoin today, which is why the history still matters to anyone whose product promises redemption at par.
In practice
No major economy runs a gold standard today. Central banks still hold gold as a reserve asset, but owning gold and promising to convert money into it at a fixed price are different commitments.
Example
If a currency unit is defined as one twentieth of a troy ounce of gold, the issuer must hand over one ounce for every 20 units presented. If it has issued 20 million units against 500,000 ounces, it can meet only half of a full run.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Gold Standard, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Bretton Woods system | Under the classical gold standard each currency was convertible into gold. Under Bretton Woods only the US dollar was, and only for foreign official holders; other currencies were pegged to the dollar. |
See also
- Bretton Woods SystemThe Bretton Woods system was the international monetary order agreed in 1944, under which currencies were fixed to the US dollar and the dollar was convertible into gold at US$35 an ounce. It created the IMF and the World Bank and ended in 1971.
- Monetary GoldMonetary gold is gold that a country's monetary authority owns and holds as a reserve asset. In IMF statistics it covers gold bullion, including allocated gold accounts, and unallocated gold accounts with non-residents that give a claim to delivery of gold.
- Currency PegA currency peg is a policy under which a central bank fixes its currency's exchange rate to another currency or a basket and stands ready to buy and sell at that rate. The peg lasts only as long as the reserves and credibility behind it.
- Floating Exchange RateA floating exchange rate is one set mainly by supply and demand in the foreign exchange market rather than fixed by the authorities. The central bank may intervene to calm disorderly moves but does not defend a particular level.
- BimetallismBimetallism is a monetary standard in which the currency unit is defined by fixed amounts of both gold and silver, and the mint coins both metals at a legal ratio. It works only while that legal ratio stays close to the market price of the two metals.
- Foreign Exchange ReservesForeign exchange reserves are the foreign-currency assets a central bank holds and can use at short notice: deposits and government securities in major currencies, gold, Special Drawing Rights and the country's reserve position at the IMF.