How the Gold Standard Functioned
Gold was previously accepted as a medium of exchange for services or goods rendered among trading nations. The gold standard is defined as an exchange involving a fixed amount of gold that guarantees a specific money value of a country. For example, one ounce of gold could guarantee a 35 US dollar value. With these standards, countries agreed to exchange a certain paper value for a fixed quantity of gold. This medium enabled a country to set a fixed gold price and sell or buy gold at predetermined prices. These fixed prices determined a country’s currency value. For instance, if America set its gold price at $200 per ounce, then 1/200th of an ounce would represent one dollar.
Evolution and The Collapse of Gold Standard
The gold standard began during the onset of international trade and it can be traced back to the mid-1800s (Amadeo, 2015). Notably, gold was an internationally recognized currency exchange medium used for paying imported goods by a country (Wild & Wild, 2014). During these periods, the gold standard allowed fixed rates of exchanges. The Federal Reserve was then created in 1913 with the main function of regulating currency values and gold. WWI then broke before this reserve started its operation forcing the suspension of gold standard, while the European countries printed paper money for military finance (Amadeo, 2015). The worsening of depression in 1929 resulted in high gold prices due to hoarding and high interest rates.
After the end of WW II, there was no depression, which made countries to adopt a customized gold standard known as Bretton Woods in 1944. This system set a 35 dollar per ounce exchange rate. The gold standard is considered to have collapsed in 1971 after the Federal was disallowed to redeem any dollar with gold. This led to countries printing more paper money to eliminate obstacles like gold loss in case a ship sank. This paper money is currently used in most economies globally due its flexibility.
Amadeo, K. (2015). History of the Gold Standard. Retrieved March 30 2016, from http://useconomy.about.com/od/monetarypolicy/p/gold_history.htm
Wild, J., & Wild, K. (2014). International Business: The Challenges of Globalization. (7th ed.). Upper Saddle River, NJ: Pearson Education, Inc.