Understanding The Gold Standard
The term gold standard refers to the practice of valuing a nation’s money against gold. In other words, if a country is willing to allow its money to be exchanged for the equivalent value of gold, it is on the gold standard.
Most nations, including the USA adopted the gold standard as a way of valuing their currencies until the mid 20th century. It is now no longer in use. It is important to note that while it was theoretically possible to approach a nation’s central bank, and ask for a specific value of currency to be exchanged for gold, in practice it was rarely, if ever allowed. Still, it was the amount of gold that a country possessed that accounted for its wealth.
However, in 1931-2 Britain abandoned the gold standard. It took the US 40 years to follow suit – gold was abandoned in 1971. In fact, it was in 1971 that for the first time in recorded history, no country had currency that could be redeemed in gold. Today a country’s currency is calculated on the basis of a complex series of variables including its Gross National Product, bank deposits and a host of other factors. This is why it is known as a “floating currency” system and why variations in the production of goods and services have such an immediate impact on currency values.
Gold is still retained by countries because its price is purely market driven and its value, which cannot be control by legislation of political maneuverings. It is therefore now an asset that can be traded rather than the basis of evaluation a nation’s wealth.
In the USA, it was at one time illegal for a citizen of the country to own gold – the theory being the dollar was the equivalent of gold so owning dollars was good enough. This law was changed in the 1970s and the last tie between the dollar and gold was cut. The US government stopped issuing gold coins as legal tender in 1933, although the US mint still issues gold coins of varying denominations which are collector’s items only.
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