The Gold Standard Term - National Currency That Is Backed by Gold

The Gold Standard

The gold standard term used to describe a national currency that is backed by gold. There are two types of gold standard: the gold bullion standard and the gold exchange standard. The gold bullion standard is the type that the United States maintained in the years following the Civil War, while the gold exchange standard traditionally has been used by smaller countries whose currency is tied to another that uses the bullion standard.

Under the bullion standard, a country establishes an official price for gold using a fixed value of its own currency. Banknotes and other paper money are then declared convertible into gold at the fixed rate. Most advanced industrial nations used this standard from about 1870 to the beginning of World War I. In 1890, the Sherman Silver Act temporarily introduced silver as part of a bimetallic standard, but there was little wide- spread support for the metal. It was officially dropped as part of the standard. The United States officially joined the gold standard with the Gold Standard Act of 1900, which unequivocally stated that only one metal would be the standard, thereby demoting silver to obscurity. Unstable conditions in the world economy after the Great War led to the demise of the classic standard inthe 1920s. The chaotic international trading conditions caused by the Depression in the 1930s led to the inauguration of the bullion standard. Under the Gold Reserve Act of 1934, all monetary gold in the United States was nationalized, and citizens were not allowed to hold gold except for industrial purposes. The prohibition lasted almost 50 years.

Adhering to the gold standard helped many countries maintain the discipline demanded by the official rate, although clearly there was more demand for gold reserves at the world’s central banks than there was supply. In the Bretton Woods era, after the end of World War II, the United States officially maintained gold at