Monday, October 25, 2010

Economics 101 (Part 2): What was the "Gold Standard"?

What Is A "Gold Standard"?

Prior to 1971, U.S. paper currency was literally a representation of gold held by the United States government. As mentioned before, gold was chosen not because of some mystical ideal surrounding the idea, but rather it's a concrete, rare, piece of earth that cannot easily be reproduced or faked.

The Gold Standard
The foundation of the gold standard is that a currency's value is supported by some weight in gold. Inherently, it makes sense to value currency by some tangible and precious resource, otherwise, currency is just paper bills. Therefore, by tying paper money to an amount of gold, it gives the holder of the paper money the right to exchange his or her paper bills for actual gold. Ideally, this requires that paper money be readily exchangeable for gold. If a bank does not have gold, then the paper money has no value. But theoretically, actual gold would flow between nations to ensure that all currencies would be supported by gold.

A pure gold standard was used between the 1879 and 1914 by many modern trading nations including the United States. Under the gold standard system, all participating currencies were convertible based on its gold value. For example, if currency x was equal to 100 grains of gold, and currency y was equal to 50 grains of gold, then 1 x was equal to 2 y.

Because currencies were convertible in gold, then nations could ship gold among themselves to adjust their "balance of payments." In theory, all nations should have an optimal balance of payments of zero, i.e. they should not have either a trade deficit or trade surplus.

Below I have provided a video that details more information about the former Gold Standard.  The creator of the video injects a lot of his opinion, but the important thing to remember right now is how the United States currency was originally designed, and what our currency is based on today.




More to come,
B.

1 comment:

  1. Great video, but you would do more good by educating on why gold and silver are important. Most do not correlate Human Capital with the metals. They need the education on why. They need to comprehend that metals store HC because a human had to have produced it by expending energy on something that someone else wants.

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