Monday, October 21, 2013

Gold standard definition and the three distinct kinds

Gold Standard: Definition And The Three Distinct Kinds

The gold standard is defined in many different reference materials as a monetary system in which the unit of currency used is a fixed quantity or weight of gold. Under this system, all forms of money, including notes and bank deposits, were freely converted into gold at the fixed price.

There are three known kinds of gold standard that have been adopted since the early 1700s - the gold specie, gold exchange, and gold bullion standards. Following is the definition and a brief historical account of each.

Gold Specie Standard:

In this gold standard, the unit of currency is linked to the gold coins that are in circulation. More specifically, the monetary unit is associated with the unit of value of a specific gold coin in circulation along with that of any secondary coinage (coins made of metal that is valued less than gold).

Recorded history points to the existence of a gold specie standard in medieval empires. For example, the Eastern Roman Empire made use of a gold coin called Byzant (from the original Greek term Bezant). The first known major area in the world to be on a gold specie standard in modern times is the British West Indies. That standard, however, was more of a commonly applied system rather than an officially established one. It was based on the spanish gold coin called the doubloon.

The United States adopted the gold specie standard "de jure" (by law) in 1873, using the American Gold Eagle as unit.

Gold Exchange Standard:

In this gold standard, only the circulation of coins minted from lesser valuable metals (such as silver) may be involved. The authorities, however, will have undertaken a fixed exchange rate with a country that's on the gold standard.

Before the turn of the 20th century, countries that were still on silver standard started pegging their monetary units to the gold standard of either the United States or the United Kingdom. For example, Mexico, the Philippines, and Japan pegged their respective silver units to the U.S. dollar at fifty cents.

Gold Bullion Standard:

In this gold standard, gold bullion is sold on demand at a fixed price. It was introduced in 1925 by the British Parliament in an act which at the same time voided the gold specie standard. Six years later, the United Kingdom decided to temporarily stop the gold bullion standard because of the large amount of gold that flowed out across the Atlantic Ocean. The gold standard eventually ended that same year.

One of the advantages of the gold standard is that it sort of restricts the government's power in inflating prices, which is possible through excessive issuance of paper currency. Also by providing a fixed pattern of exchange rates, the gold standard may effectively lessen uncertainty in international trade.

As to its disadvantage, the gold standard may make monetary policy ineffective in stabilizing the economy in the event of a general slowdown in economic activity. This is likely, as many economists fear, since under the gold standard the supply of gold would be the exclusive determinant to the amount of money.


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