What is the gold standard monetary system

Gold standard

Gold standard. Currency system in which gold is used as legal tender or in which a certain part of the issued currency must be backed by gold and can be exchanged for gold at any time.

The aim of the Bretton Woods conference (1944) was to stabilize relations between national currencies, i.e. to prevent strong currency fluctuations. For this purpose a new currency order was created. The dollar became the reserve currency, while a fixed exchange rate to the dollar was set for the currencies of the IMF member states (fixed rate system). At the same time, the value of the dollar was measured in gold and the American central bank (Fed) was obliged to exchange dollars for gold (35 dollars / ounce). When the fixed rate system collapsed in 1973 because the United States no longer had enough gold reserves, the gold standard also became meaningless.

In a system of the pure gold standard, the national currencies can be freely and without restriction convertible into gold at a fixed price. The currency reserves consist exclusively of gold. In the domestic economy, the central bank guarantees a fixed price between the monetary unit and gold and is ready to buy or sell gold at any time. If this system is used in different countries at the same time, the relative gold prices between the different national currencies automatically determine the exchange rate (gold currency).

international currency system in which the parities are fixed in gold and the currency in circulation is linked to the gold reserves. The par rate between two gold currencies results from the relationship between the gold parities of the individual national currencies. The fluctuations in the exchange rates forming on the foreign exchange market are limited by the gold points, which in turn are determined by the translocation costs of gold (transport, insurance, loss of interest, etc.). As soon as the exchange rate exceeds the upper gold point as a result of a balance of payments deficit, it becomes advantageous to procure the required foreign exchange through gold exports. Because the currency in circulation is tied to the central bank's gold reserves, there is a monetary contraction through which the balance of payments is re-established via a fall in the price level. The actual gold movements were kept within narrow limits below the gold standard, since monetary policy was placed in the service of balance of payments from the outset. The gold standard played a dominant role in the international monetary system between 1870 and 1914, whereby the safeguarding of the external economic equilibrium was given absolute priority. The effects of World War I, such as war inflation, decreasing flexibility in prices and wages, a lack of gold in many countries and the transition to the deliberate use of monetary and credit policy for national goals, led to a fundamental change in the conditions for maintaining the gold standard. Nevertheless, in 1919 numerous countries tried to restore the gold standard and, regardless of the price increases that had occurred, to bring the gold parity as close as possible to the pre-war parity, e.g. Great Britain in 1925. In order to save gold, most countries went to the gold core currency - the central bank uses gold to meet their needs Redemption obligations to other central banks, however, redeeming the inferior money in gold is not possible - and using the gold currency standard. The international financial crisis of 1929 and the subsequent global economic crisis, the abolition of the gold convertibility of the pound sterling (1931) as well as the re-setting of the dollar parity, combined with a 45 percent devaluation of the dollar, led to a collapse of the gold standard, which finally occurred when the 1933 was founded Gold bloc, consisting of Belgium, the Netherlands, France, Italy, Poland and Switzerland, which had adhered to the gold standard as agreed, dissolved in 1936 and both the French franc and the Swiss franc had to be devalued in the autumn of the same year. Literature: Bordo, M.DJSchwartz, A.J., A Retrospective on the Classical Gold Standard, 1821-1931, Chicago, London 1984.

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