The Era Of Gold Standard

There was a time in history when the gold standard existed as a monetary system, and is still considered a good one. This monetary system required all the countries taking part in this system, to pledge that they will keep the rate of their currencies in terms of gold.

The gold standard was first adopted by the United Kingdom. In the 1790s, there was a great shortage of silver in the UK, and so it started a major restructuring programme through which, gold coins were introduced. In’44, the Bank Charter Act was introduced according to which, the Bank of England notes, backed by gold, were made the legal standard in the country. The United States at that time was following a bi-metallic standard, which is the use of both gold, and silver.

However, the gold standard was embraced in’73, when gold was made the legal standard, and both major nations started using it. Other countries such as Germany, Italy, and France, also followed, and participated in this monetary system. The gold standard existed from’80 to’14, and resulted in main monetary development all over the world.

The gold standard was used to regulate the demand and supply of the currency of a country in the long term. It helped in keeping the money supply stable. It was also used for determining the exchange rate of currency between two countries.

All currencies moved together, and the gold standard led to a fixed exchange rate all over. All doubts in economy were removed, and even inflation could be controlled since governments could not float currency in the market to build pressure.

Although the gold standard seemed to be appealing, but due to certain effects of it, this system was ended. The biggest drawback of the gold standard being the domino effect of the economy of one country on another country, forced the price levels, money supply and economy to be varying all the time. Due to this, many times the world economy would become unbalanced.

Not all countries were loyal to these rules, and they did not change their discount rates loyally. Many people were unemployed during this time since economy was always changing, and there was also immense pressure on countries, which produced gold. Hence, the gold standard monetary system was finished.

The gold standard has no chances of coming back in the monetary system, but still many people believe it will be good for the economy. Although it managed to keep a fixed exchange rate, keep the price levels stable and did not give central banks the control of financial strategy, this system still had its drawbacks.

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