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What Is And How Does The Gold Standard Work?

Posted on November 17, 2022November 17, 2022 by Darla Cabral

The gold standard is a monetary system backed by gold. In other words, the value of each monetary unit is fixed in terms of a specific amount of gold. With this system, the issuer of the currency guarantees that the bills and coins issued are backed by gold. If central banks back their currency in gold and silver, this system is called a bimetallic standard.

The money-gold equivalence has been the basis of the international financial system and its guarantee since the 19th century.

As a result of the needs arising from the First World War, some of the countries participating in the conflict printed more money to finance the war effort without the backing of the precious metal, which is known as fiduciary money, or fiat money (based on on the trust or faith of a promise to pay, but not backed by the precious metal).

It was at Bretton Woods (USA), on July 22, 1944, at the United Nations monetary and financial conference, when the adoption of the dollar as a global currency was approved. Until then, the US currency was legally convertible into gold, at a rate of $35 per ounce.

The gold standard remained in force in the United States until its abolition in 1971. From then on, the dollar was sustained only by the trust that had been placed in it and the US economy. Currently, it costs the US Bureau of Minting and Printing a few cents to produce a $100 bill, while other countries have to produce $100 worth of actual merchandise to get one of those bills.

Many are the economists and presidential advisers who have advised the different presidents of the United States to abandon the “dollar standard” and return to the gold standard, with a modernized and international method, such as those proposed in 1960 and 1984, but no president has decided to take the step.

The fact that the monetary system is no longer based on the gold standard, but on a fiat money system, with no support other than trust in the central bank, has been the subject of much criticism.

Compared to these fiat currencies, based on trust, gold is presented as the most viable solution to the problem of pensions: “in all international crises that have been experienced throughout history, gold has played a key role , from the time of Greece and Rome to the most recent political crises. Gold and precious metals are the real money, universally recognized and accepted, generation after generation, and guarantee of purchasing power throughout the more than 6,000 years that it has been with us”.

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