Many countries have set the gold standard as a monetary system where the currency in use is based on a fixed amount of Au. In this monetary system, cash and deposits in the bank can be converted into gold and fixed rate. So far there are 3 common types of standards and they have been in practice since the 18th century. These are known as the gold specie, gold bullion standard, and gold exchange. To learn more about these three different criteria, a brief explanation is included below:
1. The type of gold. In this gold standard option, the unit of currency has a direct relationship to the gold coins in circulation. In other words, the unit of currency is related to the unit of value of each different gold coin. Minor coins with a lower value than gold use the same rules as well. The existence of the standard for gold coins was revealed in the era of medieval empires. Byzantine (Greek) and the British West Indies are some golden standard examples. However, this type of standard is rather a system in effect because it has not been formally established. It is originally from Spain and is known as the Doubloon. In 1873, the system was legally adopted by the United States and the American Gold Eagle was used as a unit.
2. Exchange of gold. This particular gold standard only includes trading coins whose value is less than gold, for example silver. Authorities tend to charge a fixed rate for the exchange of gold to countries that use the gold standard. Many countries choose to peg their currency units to the gold standard in the United States and the United Kingdom. For example, the Japanese, Mexicans, and Filipinos choose to exchange silver for US dollars at $ 0.50 per unit.
3. Gold bars. This type of Gold Standard sells gold bars at fixed prices based on demand. This method of circulation was first implemented by the British Parliament in 1925 as it revoked the gold standard for coins. In 1931, the UK government took the decision to temporarily abolish the gold bullion standard to curb the excessive flow of gold across the Atlantic. The same year saw the end of the gold standard.
The use of the gold standard brought many advantages. One is that the power to determine the occurrence of inflation within a country is not entirely vested in the government. In other words, inflation can be curbed by preventing the excessive issuance of paper currency by the government. At the same time, gold and silver exchange rates will develop a steady pattern in which global economic uncertainty can be reduced to a significant level. However, just like many other monetary systems, the gold bullion standard has its own set of disadvantages as well. It is believed that it may not be able to stabilize the economy during a depressed financial situation because it may cause ineffective monetary policy. This belief is logical, and many economists fear their theory will come true. In the gold standard, availability of (Au) is the only determinant of availability of money.