Gold Standard

Gold Standard, in economics, monetary system wherein all forms of legal tender may be converted, on demand, into fixed quantities of fine gold, as defined by law. Until the 19th century, most countries of the world maintained bimetallism as the basis of their monetary systems. The widespread adoption of the gold standard during the second half of the 19th century was largely a result of the Industrial Revolution, which brought about a vast increase in the production of goods and widened the basis of world trade. The countries that adopted the gold standard had three principal aims: to facilitate the settlement of international commercial and financial transactions; to establish stability in foreign exchange rates; and to maintain domestic monetary stability. They believed these aims could best be accomplished by having a single standard of universal validity and relative stability; hence the gold standard is sometimes called the single gold standard.

The first country to go on the gold standard was Great Britain, in 1816. The United States made the change in 1873, and most other countries followed suit by 1900. With some exceptions, the prevalence of the gold standard lasted until the Wall Street Crash in 1929 and the ensuing Great Depression. Between 1931 and 1934, the governments of virtually all countries found it expedient or necessary to abandon the gold standard. This policy was partly motivated by the belief that the exports of a country could be stimulated by devaluation of its currency in terms of foreign exchange. In time, however, the advantage thus gained was offset as other countries also abandoned the gold standard.

In 1975 the role of gold was further diminished when the US government began to sell some of its holdings on the open market, making gold more of a commodity than a standard in the international monetary system. By the end of the decade no major currency was redeemable in gold. Switzerland, which ended the free convertibility of the Swiss franc into gold in 1954, still requires a proportion of its currency to be backed by gold.