Many countries have been defining gold standard as a monetary system whereby the currency used is based on a fixed amount of (Au). In this monetary system, cash and deposits in the bank can be exchanged into gold and the price is fixed. Up to now there are 3 common types of standard and they’ve been practised since the 1700s. These are known as the gold specie, gold bullion standards and gold exchange. To know a bit more about these three different standards a brief explanation is included below:
1. Gold Specie. In this particular gold standard option, the currency unit has a direct connection with the circulated gold coins. In other words, the unit of currency is connected to the unit of value of each different gold coin. Secondary coinage with lower value than gold uses the same rules as well. The presence of gold specie standard was detected in the era of medieval empires. The Byzant (Greek) and the British West Indies are some of the gold standard examples. However, this type of standard is rather an applied system as it’s not formally established. It origins from Spain and it’s known as the doubloon. In 1873, the U.S. legally adopted the system and American Gold Eagle is used as unit.
2. Gold Exchange. This particular gold standard only involves the circulation of coins valued less than gold, for instance silver. The authorities tend to impose a fixed rate for gold exchange on countries that are using the gold standard. Many countries choose to peg their currency units to the gold standard in the U.S. and U.K. For instance, the Japanese, Mexican and Filipino choose to exchange their silver to USD at the price of $0.50 per unit.
3. Gold Bullion. This type of gold standard sells gold bullion via fixed prices based on demand. This method of trading was first carried out by the Parliament of the British in 1925 whereby it resulted in the voidance of the gold specie standard. In 1931, the U.K. government made a decision to banish the gold bullion standard on a temporary basis to curb the excessive flow of gold way past the Atlantic Ocean. The same year witnessed the ending of the gold standard.
The utilization of gold standard has brought about several advantages. One of them is that the power of determining the occurrence of inflation within the country is not totally given to the government. In other words, inflation can be curbed by preventing the issuance of excessive paper currency done by the government. At the same time, the gold and silver exchange rates will develop a fixed pattern whereby global economic uncertainties can be reduced at a great level. However, just like many other monetary systems, gold bullion standard has its own set of disadvantages as well. It’s believed that it might not be able to stabilize the economy during depressive financial condition as it might cause the monetary policy to become ineffective. The belief makes sense, and a lot of economists are afraid that their theory would come true. In gold standard the availability of ( Au ) is the sole determinant to the availability of money.