Gold vs Currencies

There was once a time in history, where a monetary system was introduced to replace barter trade. The gold standard was originally implemented as a gold specie (money in the form of coins rather than notes) standard. However, this too ended. First, in the United Kingdom. Then, the rest of the world later followed suit during the break of the First World War. In 1971 August 15th. R. Nixon, president of the United states of America announced that the country would no longer convert dollars to gold at a fixed value. Thus, resulting in the abandonment of the gold standard.

What is the Gold standard?

The gold standard is a monetary system in which the standard unit value of a currency is fixed of gold or kept at the value of a fixed quantity of gold. It was widely used in the 19th century and early 20th. The currency is freely convertible at home or abroad into a fixed amount of gold per unit of currency. In other words it is when a country ties the value of its money to the amount of gold it possesses. Anyone holding paper money could present it to the government and receive an agreed-upon amount of gold from the country’s gold reserve.  

In a gold standard system, gold is a ”standard value” because it is stable when used as a standard value. The economy is not too troubled excessively from the various distortions that take place when money changes value. Because it is a standard, that is not subject to human influence. This more easily becomes a standard that people can share. So, many countries can use it, and we get all the advantages of a shared standard of value. This ensures that not one economy dominates the other economies.

To give a figure of the gold standard. The graph above represents the value of $1 000 in gold oz from 1789-1914. In the 1930s the United states of America abandoned this system after the great depression. This meant that currency was no longer defined by Gold and did not serve as a reference to all other foreign currencies.

$1 000 in gold oz from 1789-1914

What are the pros and cons of the gold standard?

Pros

Gold is a fixed asset that backs the money’s value. Thus it provides a self –regulating and stabilizes the effect on the economy. The government can only print as much money as the country’s gold reserve. This proponent discourages inflation. Inflation reduces the purchasing power of each unit currency.

Gold has retained value throughout history whilst paper money is fiat .Currency that is can be printed without any limit has no real value. However, gold has real value due to its beauty, usefulness and scarcity. Gold retains value better than anything else.It has been that way since 550BC. The gold standard is advantageous to countries that produce more and export more. This would mean that countries receive gold when they export. With that said the more Gold in a countries reserve the more money they can print.

The Gold standard self regulates to match the supply of money. Since gold is a finite natural material .For the mere fact that it is mined and processed at a significant cost, it tends to be produced at levels consistent with demand. Under the gold standard creating more currencies requires a country to have more Gold in its reserve.

gold specie (money in the form of coins rather than notes)
gold specie (money in the form of coins rather than notes)

Cons

There are many factors that make the Gold standard not as effective. One of the underlying problem is that a country’s economy is dependent on its supply of gold. The supply of money, would be dependent on how much gold is produced. Countries without any gold are at a competitive disadvantage. Why? Because, the economy is not reliant on the resourcefulness of its people and businesses. This affects the business climate as countries become obsessed with keeping their gold and ignoring the important factors of trade.

The gold standard makes the supply of money vulnerable to the ups and downs of the gold production. Because of this inflation would occur when large gold discoveries are made and deflation would occur during period of gold scarcity. This limits the ability of the Federal Reserve to help the economy out of recessions and depressions.

Why was the gold standard abandoned?

During the great depression. The American economy, along with other European economies suffered greatly as there were massive job cuts. The world suffered 43 Months of economic turmoil. People endured years of pain and hardship. Many lost their homes due to mortgages running late.

In the US the Federal Reserve raised interest rates. President Nixon  saw the need to help the country and its people. He did so by making the Dollar more valuable than Gold thus preventing people from demanding gold. This gave the dollar a first mover advantage. It  assisted in strengthening the US-dollar against other currencies. Therefore, this has made the most powerful economy up until this day.

gold
Gold vs Currencies

Could the gold standard be effective during these times of a COVID-19?

The ending of 2019 , China discovered a virus that could not be contained .They kept it a secret from the world, as they tried to contain it. Today ,the COVID-19 pandemic has by far plagued the world with death. It has also affected the world economy. Making this one of the worst financial crisis ever recorded in history.

Many of the working class and lower middle-class have been caught off-guard by this. Large economies hugely affected by this. The lower & middle-class  are faced , with the challenge of surviving with skills they have acquired from a life of barely surviving. Some lucky ones  having  to enforce  a “last minute” to savings strategy in order to survive of whatever money they have left.

Investing in Gold ,could provide better options that the lower middle-class are not given by the financial advisers. The South African market has been downgraded more than once now, the USA oil prices have hit an all-time low. These are just a few examples of the direction the world economy is taking. So where do you hide your money to make it stronger?

Gold is the answer

Take your money and store it in gold banks and buy as much commodities as you can in this time.  This will guarantee you a fixed amount when the world economy stabilises again and the cost of living has changed. That is how the rich keep getting richer and the poor get poorer.

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3 thoughts on “What is the Gold Standard?

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