Gold Standard - Econlib

Since 1971, money has not been backed by gold, nor by any other commodity. It has been used as money in the past, as well as various substances.

At various times in history people all over the world used ways of making money from cowry shells salt, cowhide, seeds, and wheat, the list is very long. The role of money is to facilitate the most efficient trade. In theory, anything could be used to fulfill the role of money. However, you will find that some materials perform better than others. You can buy gold bullion Australia wide as commodities turns out to be the best out of them all, for reasons we’ll discuss below.

Paper money is not backed by gold

It is strange that there are people who still believe that their currency is still backed by gold until the value of the gold drops. Some believe in the idea that currencies are linked to the price of oil.  This isn’t e

What does the term “paper currency” mean? It simply describes a currency that derives its value from a government decree. In other words, paper money has value only because the government says so. While fiat currency has no intrinsic value, this does not mean that it is inherently worthless. First, coins are always accepted by the governments that issue them to pay taxes.

The value of paper money is also backed by that government issuing it

Most currencies are linked to the US dollar as well as the price of gold. It should be noted that fiat can affected by other macroeconomic factors:

  • The size of the US economy compared to other countries
  • The fact that many foreign central banks hold dollars as reserve
  • A powerful US network of business alliances
  • US military strength, or threat

How does the gold standard work?

At various times throughout history, world trade has in fact operated on the gold standard. Gold served as money all over the world. This arrangement arose in the early 7th century BC. The heyday of the “classic” period of the gold standard was in the eighteenth and nineteenth centuries. Under this system, the government can issue money only if there is sufficient reserve of gold to support its value. Copper and metal coins circulating in the economy had to be converted into gold products (gold coins). For everyday transactions, banknotes and other coins are more commonly used. While gold is actually money, it actually acts as a bank reserve.

Despite its advantages, the gold standard is by no means perfect. It has been periodically suspended, at times misused by government officials, and has not been uniformly adopted by all countries on the planet. However, respect for the gold standard has created a consistent standard for the value of money around the world.

Does this mean that our fiat currency has no value? It just means that our money is subject to inflation and will not retain its value over time. The current Fiat program is not designed to reward financial savings. This is one of the main reasons why people buy gold bullion Australia wide.

It is better to treat money as a medium of exchange and a unit of account. Unfortunately, it’s more than just a trusted store of value. With our current system of floating exchange rates, there is a trade-off when a currency is weak or when it’s strong. A weak currency makes a country’s export products more attractive while a strong currency does the opposite. However, a strong currency increases the purchasing power of a country’s imports.

The bottom line is that gold cannot be used as money, but simply to save money and not as an investment for the future.

By Rehan

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