The Gold Standard was a monetary system in which the participating countries made a commitment to make gold their currency. It was the most famous monetary system in history, but is no longer in use.
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, in’73, the Fourth Coinage Act was passed, through which, the gold standard was embraced. Following these two major nations, many other countries also adopted the gold standard such as Germany, France, and Italy. The period from’80 to’14 is known in history as the classic gold standard. At that time, most nations of the world had moved towards the gold standard, and there was a lot of economic growth throughout 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.
Hence, all over the world, a fixed exchange was followed, which reduced the insecurity of the economy. Even the price increase was controllable since the government could not form any inflationary pressures by floating the currency in the market.
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.
Apart from this, to be a part of the monetary system, all participants were required to abide by certain regulations, which were not convenient for all countries. They were bound to change exchange rates as per the fixed rate, and most of them did not follow this. Even unemployment rate was at its peak, and all the countries, which produced gold, had huge demands on them.
Several supporters of gold standard still exist, even though the system is no longer there. These supporters still believe that the gold standard brings in stability in the prices, keeps the control of monetary policy away from the central banks, and manages a fixed exchange rate. Perhaps the gold standard cannot be revived again any time soon.