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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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Gold Quotes

    Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium.
    -Murray N. Rothbard


    The history of fiat money is little more than a register of monetary follies and inflations. Our present age merely affords another entry in this dismal register.
    -Hans F. Sennholz


    As fewer and fewer people have confidence in paper as a store of value, the price of gold will continue to rise.
    -Jerome F. Smith


    Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few gold has been the asset of last resort.
    -Antony C. Sutton


    For more than two thousand years gold's natural qualities made it man's universal medium of exchange. In contrast to political money, gold is honest money that survived the ages and will live on long after the political fiats of today have gone the way of all paper.
    -Hans F. Sennholz


    When paper money systems begin to crack at the seams, the run to gold could be explosive.
    -Harry Browne


    In a country whose currency is not convertible into gold, inflation leads to its continuous devaluation in terms of foreign currencies.
    -Michael A. Heilperin


    Until government administrators can so identify the interests of government with those of the people and refrain from defrauding the masses through the device of currency depreciation for the sake of remaining in office, the wiser ones will prefer to keep as much of their wealth in the most stable and marketable forms possible - forms which only the precious metals provide.
    -Elgin Groseclose


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