Many economists talk about the gold standard, but very few of us know what is the meaning of the gold standard. The gold standard is a monetary system where the country’s paper money or currency, is directly linked to gold. With the gold standard, the country agrees to exchange money into a fixed amount of gold. That country sets a fixed price for gold, it buys and sells gold at that price. The value of the currency is used to determine the price of gold. The amount of gold the country possess must be equal to the amount of currency circulating.
England was the first to adopt the gold standard and that was back in 1717. The United States followed and by 1880, most countries had adopted the gold standard. The gold standard continued to be part of the world’s monetary system with a small break between the first world war, the great depression and the second world war. It took President Nixon in August 1971 to abolish the rule of the gold standard.
The truth of the matter is people never trusted paper money or even coins. From the ancient times, coins had to be made out of gold, you see gold was the value behind the coin. The first gold coins go back to Asia Minor 3000 years ago.
Today the world operates on fiat currency which is a currency used because the government says so, or because fiat currency must be accepted as a means of payment.
Over the years there has been many voices calling for governments to go back to gold standard. Lately Alan Greenspan the former Federal Reserve Chairman. urges the US government to reform its monetary policy and go back to gold standard. All I have to say is that I agree with him., as a major financial asset and also by investors in order to preserve their wealth.
Nowadays gold is still used by governments and banks, as a major financial asset. Banks also use it as an insurance for loans made to government. Investors too use gold, to preserve their wealth.