Was it a good move to move from Gold Standard to a Fiat Standard?
The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $900 an ounce, the value of the dollar would be 1/900th of an ounce of gold.
Sourced: Gold Guys (Maciej Korzekwa)
The gold standard is not currently used by any government. Britain stopped using the gold standard in 1931, and the U.S. followed suit in 1933, finally abandoning the remnants of the system in 1973.The gold standard was completely replaced by fiat money, a term to describe currency that is used because of a government's order, or fiat, that the currency must be accepted as a means of payment. In the U.S., for instance, the dollar is fiat money, and for Nigeria, it is the naira. The appeal of a gold standard is that it arrests control of the issuance of money out of the hands of imperfect human beings.
Sourced: Investopedia
With the physical quantity of gold acting as a limit to that issuance, a society can follow a simple rule to avoid the evils of inflation. The goal of monetary policy is not just to prevent inflation, but also deflation, and to help promote a stable monetary environment in which full employment can be achieved. A brief history of the U.S. gold standard is enough to show that when such a simple rule is adopted, inflation can be avoided, but strict adherence to that rule can create economic instability, if not political unrest. The gold standard is a monetary system in which a currency's value is pegged to gold.
Why Did the U.S. Abandon the Gold Standard?
As its name suggests, the term gold standard refers to a monetary system in which the value of a currency is based on gold. A fiat system, by contrast, is a monetary system in which the value of a currency is not based on any physical commodity but is instead allowed to fluctuate dynamically against other currencies on the foreign-exchange markets. The term "fiat" is derived from the Latin fieri, meaning an arbitrary act. In keeping with this etymology, the value of fiat currencies is ultimately based on the fact that they are defined as legal tender by way of government adapted. In the decades before the First World War, international trade was conducted based on what has come to be known as the classical gold standard. In this system, trade between nations was settled using physical gold. Nations with trade surpluses accumulated gold as payment for their exports. Conversely, nations with trade deficits saw their gold reserves decline as gold flowed out of those nations as payment for their imports.
Overview
While gold has fascinated humankind for 5,000 years, it hasn't always been the basis of the monetary system. A true international gold standard existed for less than 50 years—from 1871 to 1914.
Sourced: ThoughtCo.
Though a lesser form of the gold standard continued until 1971, its death had started centuries before with the introduction of paper money—a more flexible instrument for our complex financial world. Today, the price of gold is determined by the demand for the metal, and although it is no longer used as a standard, it still serves an important function. Gold is a major financial asset for countries and central banks. It is also used by the banks as a way to hedge against loans made to their government and as an indicator of economic health. Under a free-market system, gold should be viewed as a currency like the euro, yen, or U.S. dollar. Gold has a long-standing relationship with the U.S. dollar, and, over the long term, gold will generally have an inverse relationship. With instability in the market, it is common to hear talk of creating another gold standard, but it is not a flawless system. Viewing gold as a currency and trading it as such can mitigate risks compared with paper currency and the economy, but there must be an awareness that gold is forward-looking. If one waits until disaster strikes, it may not provide an advantage if it has already moved to a price that reflects a slumping economy, so what does this un-tale towards the loan burden that our country is in debt of, to be continued....
By Sunny Wadhwani
September. 18th 2022.
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