Gold standard: Currency backed by gold

Curant coins are covered by their material value. © own image

For centuries, gold and silver were a common currency. Gold coins and silver co ins passed from hand to hand as circulation coins. The value of the coins was directly covered by their material value (curant coins).

What is the gold standard?

In the 19th century, people then moved on to other forms of gold backing. It was no longer the metal value of the coins themselves that determined the value, but the knowledge that the central bank had to exchange each coin or banknote for gold (gold convertibility).

The bottom line is that several forms of a gold standard can be identified, depending on the amount of gold actually used to "collateralize" the value.

Gold Circulation Currency: Currency that is 100% backed by gold. Either by actual gold currencies or full coverage by the central bank.

Gold core currency: In this form of the gold standard, only a percentage of the currency is covered by gold (partial coverage). The central bank does not necessarily have to hold the gold reserves to actually exchange the entire money supply in circulation into gold. However, a certain percentage must be held as a gold reserve.

Gold foreign exchange standard: Instead of covering the value of their own currency with their own gold reserves, central banks could also hold foreign exchange backed by gold. Their own currency is then only indirectly covered by gold.

A currency is thus referred to as a gold standard if it either consists directly of gold coins or if the currency can be exchanged at any time for a defined quantity of physical gold at the responsible central bank.

The great advantage of a gold standard is the high stability of gold-backed currencies. This is because the value is always linked to the gold price and the quantity of gold is naturally limited. The exchange rates between different gold-backed currencies and the confidence in such are therefore also high.

A disadvantage, on the other hand, is the lack of flexibility with regard to economic and monetary policy measures.

When was the gold standard abandoned?

After most countries had abolished the gold convertibility of their currencies in the wake of World War I, states returned to the gold standard in the 1920s. However, different economic policy developments and the crises of the 1920s and 1930s soon forced many countries to abandon the gold backing of their currencies.

U.S. President Franklin D. Roosevelt suspended gold convertibility in 1933 and even imposed an interim private gold ban. As a result, many other countries also abandoned gold backing for their currencies.

In the Bretton Woods system, the dollar was backed by gold. © own image

After World War II, the Bretton Woods system agreed on a system of fixed exchange rates, with the U.S. dollar acting as the reserve currency. As such, the U.S. dollar was backed by gold. One troy ounce of gold cost $35, and the Fed was obliged to exchange dollars for gold at this price at any time.

The gold standard was finally abandoned in 1971, when then U.S. President Richard Nixon declared that he was abandoning gold convertibility. And thus no longer to exchange U.S. dollars for gold.

States gold reserves

Austria's Gold Reserves © courtesy of the OeNB

Even though there is no longer a gold standard in any country in the world, virtually all central banks still hold physical gold as a currency reserve.The gold bars that the central banks have in their vaults as a gold reserve are so-called good delivery bars. These are gold bars that have to meet certain quality requirements of the London Bullion Market Association (LBMA).

Return to the gold standard?

Again and again, one hears calls for a return to the gold standard. Especially in times of high inflation or massive expansion of the money supply (quantitative easing), critics cite gold backing as a potential solution. Most economists, however, do not consider a return to the gold standard to be expedient, as such a system is too rigid for modern economies.

Recently, however, rumors surfaced that the BRICS countries (Brazil, Russia, India, China and South Africa) were planning to introduce a common gold-backed currency to break the dollar hegemony.

Physical gold as protection against currency decline

A return to a gold-backed U.S. dollar or even the introduction of a gold-backed euro is not in sight. Nevertheless, everyone can protect themselves against a decline in value or currency by building up their own personal gold reserve.

Gold is an excellent way to hedge saved assets, is a proven form of "economic self-defense" against ongoing devaluation of their money and also outlasts currency crises (collapse of the euro).

 

Austria (florin) | 4 florin | gold coin 222,80 

We therefore advise our customers to invest about 10-20% of their assets in gold, silver, platinum and other precious metals. Not to speculate with, but as a real hedge against currency devaluation, currency decline and financial-political crises.

With an investment in precious metals you are in any case always on the safe side! Due to its limited availability, gold has been a lasting value for many centuries. You can rely on that!

You want to buy or sell gold?

Come now for a personal, non-binding and serious consultation in one of our branches in Vienna. Or buy your personal "gold reserve" directly in our online store!
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