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The Three Standards Used for Gold

What is the gold standard? This was defined as a monetary system where the unit of currency is used to determine the fixed quantity or weight of gold. Using this method, investors, traders and bankers alike will find it easier to convert all forms of money including bank deposits and bank notes into gold at a fixed price.

Three known types of gold standard are being used today, which have been adopted since the early 1700s. These include the gold specie standard, gold exchange and the gold bullion standards with a main purpose of producing a currency of stable value. The gold specie standard is the gold standard used for the gold coins that are in circulation. To be more specific, this is the monetary unit associated with the unit value of a specific gold coin in circulation with respect to any secondary coinage, or those coins with value less than gold, in circulation.

Historical references for this gold standard dated back in the medieval empires when the Eastern Roman Empire made use of a gold coin called Byzant as their form of currency. However, the first known modern application of the gold specie standard was in the British West Indies based on the Spanish gold coin, the doubloon. The United States, meanwhile adopted this standard in 1873, with the American Gold Eagle as the unit.

The next gold standard is the gold exchange standard where coins minted from lesser valuable metals like silver can be included. However, this will require the authorities to undertake a fixed exchange rate with a country that is on gold standard. For instance, countries like Mexico, Japan and the Philippines have to peg their silver units to the US$0.50 cents. This practice started before the turn of the 20th century where countries that still on silver standards have to peg their monetary unit to the gold standard of US or UK.

The gold bullion standard is the last type of the gold standard where gold bullions are sold on demand at a fixed price. Introduced by the British Parliament in 1925 where it also voided the gold specie standard; it was temporarily stopped six years later due to the large volume of gold that flowed out from across the Atlantic Ocean, which also ended the gold standard the same year.

One of the many advantages of the gold standard is its restrictions on the government’s power in inflating prices with the over issuance of paper currency. It also provides a fixed pattern of exchange rates, which can also help lessen the uncertainties in international trade. It also does not inhibit the financial tools that are commonly used today like bank transfers, credit cards, derivatives and other instruments since they will always remain the same, denominated in a currency of stable value.

However, it can have its advantages as it can also make monetary policies ineffective in the event of a general slow down in economic activities. This is what the economists fear the most, since under the gold standard; the supply of gold would be the exclusive determinant for the value and amount of money.

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