Why is money backed by gold

Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold.

With the gold standard , countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U. The gold standard is not currently used by any government. Britain stopped using the gold standard in and the U.

In the U. The appeal of a gold standard is that it arrests control of the issuance of money out of the hands of imperfect human beings. With the physical quantity of gold acting as a limit to that issuance, a society can follow a simple rule to avoid the evils of inflation.

The goal of monetary policy is not just to prevent inflation, but also deflation , and to help promote a stable monetary environment in which full employment can be achieved. A brief history of the U. As its name suggests, the term gold standard refers to a monetary system in which the value of currency is based on gold. A fiat system, by contrast, is a monetary system in which the value of currency is not based on any physical commodity but is instead allowed to fluctuate dynamically against other currencies on the foreign-exchange markets.

The term "fiat" is derived from the Latin "fieri," meaning an arbitrary act or decree. In keeping with this etymology, the value of fiat currencies is ultimately based on the fact that they are defined as legal tender by way of government decree.

In the decades prior to the First World War, international trade was conducted on the basis of what has come to be known as the classical gold standard. In this system, trade between nations was settled using physical gold.

Nations with trade surpluses accumulated gold as payment for their exports. Conversely, nations with trade deficits saw their gold reserves decline, as gold flowed out of those nations as payment for their imports. This statement foresaw one of the most draconian events in U. Gold has a history like that of no other asset class in that it has a unique influence on its own supply and demand. Gold bugs still cling to a past when gold was king, but gold's past also includes a fall that must be understood to properly assess its future.

For 5, years, gold's combination of luster, malleability, density and scarcity has captivated humankind like no other metal. At the start of this obsession, gold was solely used for worship, demonstrated by a trip to any of the world's ancient sacred sites.

Today, gold's most popular use is in the manufacturing of jewelry. Around B. Before this, gold had to be weighed and checked for purity when settling trades. Gold coins were not a perfect solution, since a common practice for centuries to come was to clip these slightly irregular coins to accumulate enough gold that could be melted down into bullion.

In , the Great Recoinage in England introduced a technology that automated the production of coins and put an end to clipping. Since it could not always rely on additional supplies from the earth, the supply of gold expanded only through deflation, trade, pillage or debasement. The first great gold rush came to America in the 15th century. Spain's plunder of treasures from the New World raised Europe's supply of gold by fives times in the 16th century.

Subsequent gold rushes in the Americas, Australia, and South Africa took place in the 19th century. Europe's introduction of paper money occurred in the 16th century, with the use of debt instruments issued by private parties. While gold coins and bullion continued to dominate the monetary system of Europe, it was not until the 18th century that paper money began to dominate.

The struggle between paper money and gold would eventually result in the introduction of a gold standard. The gold standard is a monetary system in which paper money is freely convertible into a fixed amount of gold. In other words, in such a monetary system, gold backs the value of money. Between and , the development and formalization of the gold standard began as the introduction of paper money posed some problems.

The U. Constitution in gave Congress the sole right to coin money and the power to regulate its value. With silver in greater abundance relative to gold, a bimetallic standard was adopted in The issue would not be remedied until the Coinage Act of , and not without strong political animosity.

Hard money enthusiasts advocated for a ratio that would return gold coins to circulation, not necessarily to push out silver, but to push out small-denomination paper notes issued by the then-hated Bank of the United States. A ratio of that blatantly overvalued gold was established and reversed the situation, putting the U.

By , England became the first country to officially adopt a gold standard. The century's dramatic increase in global trade and production brought large discoveries of gold, which helped the gold standard remain intact well into the next century. As all trade imbalances between nations were settled with gold, governments had strong incentive to stockpile gold for more difficult times. You can see it in the early '80s oil crisis and recession and the most recent financial crisis, when gold prices soared, only to fall sharply once the overall economic environment improved.

This situation is largely what led Franklin D. Roosevelt to sever the convertibility of U. Under the gold standard especially when currency could be converted to gold , hoarding gold had a direct impact on monetary flow, hurting commerce and exacerbating recessions. By severing the link between gold reserves and currency, the Federal Reserve is better able to combat major economic shocks to the economy.

It's fair to argue that the Federal Reserve's efforts to limit the impact of economic crisis could have unforeseen long-term effects, based on the additional money that has been put in circulation, versus a gold or silver standard that limits how much money circulates.

The problem gets back to times of major economic crisis: When governments need tools to stop or reduce the harm, a commodity standard has historically had the opposite effect as people hoard it.

By severing the tie between a commodity that people tend to hoard in times of crisis and the value and supply of money, a fiat currency is a better alternative, but only so long as those pulling the levers of monetary supply keep the balance between supply and demand stable.

Here's the bottom line: Currency is a tool of trade. People tend to hoard gold and silver when things are uncertain, and that's harmful when it limits currency flows on a large scale. Removing the relationship between a currency and commodity doesn't create "worthless money. It simply keeps panic from causing greater economic harm in times of crisis when people hoard the underpinning of a commodity currency and stop the wheels of commerce.

And that makes a fiat currency far better than a gold standard. Discounted offers are only available to new members. Stock Advisor will renew at the then current list price. Investing Best Accounts.

Stock Market Basics. Stock Market. Industries to Invest In. Generally, I stay away from anything that proposes any actual new currency outside of the sovereign system. If you want to buy gold, then buy gold.

The country you are a citizen of has no doubt debased your savings and eaten away at your nest egg with their destructive policies. Having a second passport is an excellent way to personally diversify yourself so that no government has total power over you. In an era where the western middle class is evaporating, savers and the wealthy will have a target on their back for anything from wealth taxes to higher estate taxes to actual asset confiscation. Being a dual citizen or even holding multiple passports give you the freedom to travel to and live in another country whenever you wish.

And it gives you a legal escape hatch to renounce your citizenship if things get bad enough that you need to pull the plug entirely. Its Free.

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This was a wonderful article by the way. It was both informative and extremely interesting! Just my 0. Doing research on de-dollarisation by China and Russia, please keep me informed of their progress on their intended Gold Standard and monetary policies.

The internet proves to be one big lie right after another. Could anyone recommend a good place to start, or at least point me in the right direction?

At this point I am very confused. I may not be the sharpest crayon in the box, but I did graduate from high school. I have no confidence in the media. This is alot harder than I thought. I just need a phone number or an email address to some where some one knows what the hell they are talking about….??

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