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Gold coins were first struck on the order of King Croesus of Lydia (an area that is now part of Turkey), around 550 BC. Gold's Role as Money The Bretton Woods System The Classical Gold Standard. They circulated as currency in many countries before the introduction of paper money.
The first use of gold as money occurred around 700 B.C.Image: REUTERS/Leonhard Foeger
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- Advantages and disadvantages
monetary system
Written and fact-checked byThe Editors of Encyclopaedia Britannica
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Updated: Feb. 02, 2024
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The gold standard was first put into operation in the United Kingdom in 1821. Prior to this time silver had been the principal world monetary metal; gold had long been used intermittently for coinage in one or another country, but never as the single reference metal, or standard, to which all other forms of money were coordinated or adjusted. For the next 50 years a bimetallic regime of gold and silver was used outside the United Kingdom, but in the 1870s a monometallic gold standard was adopted by Germany, France, and the United States, with many other countries following suit. This shift occurred because recent gold discoveries in western North America had made gold more plentiful. In the full gold standard that thus prevailed until 1914, gold could be bought or sold in unlimited quantities at a fixed price in convertible paper money per unit weight of the metal.
Gold bars.
Courtesy of the United States Mint
The reign of the full gold standard was short, lasting only from the 1870s to the outbreak of World War I. That war saw recourse to inconvertible paper money or to restrictions on gold export in nearly every country. By 1928, however, the gold standard had been virtually reestablished, although, because of the relative scarcity of gold, most nations adopted a gold-exchange standard, in which they supplemented their central-bank gold reserves with currencies (U.S. dollars and British pounds) that were convertible into gold at a stable rate of exchange. The gold-exchange standard collapsed again during the Great Depression of the 1930s, however, and by 1937 not a single country remained on the full gold standard.
The advantages of the gold standard are that (1) it limits the power of governments or banks to cause price inflation by excessive issue of paper currency, although there is evidence that even before World War I monetary authorities did not contract the supply of money when the country incurred a gold outflow, and (2) it creates certainty in international trade by providing a fixed pattern of exchange rates.
Learn more about how inflation functions in the economy.
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The disadvantages are that (1) it may not provide sufficient flexibility in the supply of money, because the supply of newly mined gold is not closely related to the growing needs of the world economy for a commensurate supply of money, (2) a country may not be able to isolate its economy from depression or inflation in the rest of the world, and (3) the process of adjustment for a country with a payments deficit can be long and painful whenever an increase in unemployment or a decline in the rate of economic expansion occurs.
The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the late 1920s to 1932 [1] [2] as well as from 1944 until 1971 when the United States unilaterally terminated convertibility of the US dollar to gold, effectively ending the Bretton Woods system. [3]
History may date the use of gold as money around 550 to 700 BC, but the use of its counterpart in the “modern” gold standard—that is, silver—predates monetary gold. The Sumerians began using silver as a monetary standard as early as 2,700 BC.
Domestic currencies were freely convertible into gold at the fixed price and there was no restriction on the import or export of gold. Gold coins circulated as domestic currency alongside coins of other metals and notes, with the composition varying by country.
Nov 8, 2010 · Business. Timeline: Gold's history as a currency standard. By Reuters. November 8, 20102:09 AM PSTUpdated 14 years ago. 1934: The Gold Reserve Act of 1934 gives the government the permanent...
