Gold Standard The gold standard represents a monetary system whereby the government of a certain country decides to allow fixed amounts of gold to be converted into currency and vice versa. The difference between two currencies for one ounce of gold determines the exchange rate. There are different types of gold standard, among which gold exchange standard, gold specie standard, and gold bullion standard. The gold exchange standard is a monetary system which usually involves the mintage and circulation of coins. A fixed exchange rate is guaranteed by the authorities, which is on the gold standard. The gold specie standard is another system whereby gold coins are circulated. Alternatively, the unit of value is determined based on a gold coin in circulation along with a subsidiary coinage, which is produced from a less valuable metal. The third type of gold standard is the gold bullion standard which is based on the decision of the authorities to sell gold at a fixed price and on demand in exchange for the currency in circulation. Gold coins are not in circulation under this standard. According to the Encyclopedia of Economics and Liberty, the gold standard is a commitment on the part of participating states to fix domestic currency prices in terms of a set gold amount. Different forms of money, including national money, notes, and bank deposits, are converted at a fixed price into gold. A de facto gold standard was adopted by England in 1717. The United States switched to gold on a bimetallic, silver and gold standard in 1834. Other states adopted the standard in the 1870s. The classical gold standard encompassed the period between 1880 and 1914 and most counties joined the gold standard during this period, which was a time of free trade in capital, labor, and goods, and economic growth. Gold Standard History Between 1834 and 1933 the United States had a fixed gold price and the price of one troy ounce of gold was $20.67. Many countries joined the gold standard by the end of 19th century. The first time the gold standard was abandoned was during the World War I. In 1931 Britain abandoned the gold standard. Two years later during the Great Depression the US government outlawed personal gold ownership and in effect nationalized gold owned by US citizens. Americans were allowed to freely own gold at the end of 1974. During the summer of 1944 the Allied Nations in World War II signed the Bretton Woods agreement. Between 1946 and 1971 these countries operated under this agreement. The Bretton Woods agreement modified the gold standard, making the US dollar the currency in which international balances were settled. The U.S. government guaranteed to redeem foreign central banks' dollars holdings for gold. The price of gold was fixed at $35 per ounce at that time. In the summer of 1971, United States declared that it would no longer exchange US dollars for gold, de facto defaulting on its obligation. This was a sad day for the world monetary system and marked the end of the gold standard. Gold Standard Benefits The Gold Standard benefits are many and include very low inflation (gold cannot be produced at will as fiat currencies), persuade people to save more instead of going deeper into debt (taking loans) and buy everything on credit, limit the government and financial oligarchy powers, put an end to the economy booms and busts (the so called business cycle), increase purchasing power as prices decline due to market productivity. There are advantages and disadvantages to adopting the gold standard. One advantage is long-term price stability because hyperinflation is close to impossible, and high levels of inflation are uncommon. High levels of inflation occur, for example, if a war destroys the economy and reduces production of goods. In addition, this type of monetary system cannot be used for the purpose of financial repression. Newly issued money is used to discharge debts and buy services and goods at no cost to the printing authority. One disadvantage is that deflation punishes borrowers because debt rises and borrowers are forced to cut spending as to repay their debts. Then, the unequal distribution of deposits of gold makes this monetary system less advantageous for some states with regard to economic power and cost. Finally, the rate of gold production determines monetary policy, and fluctuations in amounts produced cause either deflation or inflation. If there is a decrease of amounts mined, this caused deflation, and when there is an increase, inflation kicks in. Moreover, some believe that this monetary system is susceptible to speculation if the financial position of the government appears weak. Others claim that the threat of speculative attacks stops the authorities from engaging in risky policy.