The Gold Standard

In the history of the economics, it wasn‘t all that long ago when paper money was commonly  understood as a receipt for a fixed amount of gold bullion. The gold standard was once a tried and true method of doing day-to-day business in most countries around the world for hundreds of years. Historically, there were different types of gold standards based on the needs of the economy.

The gold exchange standard, used in America up until the 19th century,
usually does not involve the circulation of gold coins. The main feature of the gold exchange standard is that the government guarantees a fixed exchange rate to the currency of another country that uses a gold standard (specie or bullion), regardless of what type of notes or coins are used as a means of exchange. This creates a de facto gold standard, where the value of the means of exchange has a fixed external value in terms of gold that is independent of the inherent value of the means of exchange itself.

This was an evolution from the gold bullion standard, a system in which gold coins do not circulate, yet the authorities agree to sell gold bullion on demand at a fixed price in exchange for the circulating currency.

In the gold specie standard, the monetary unit is associated with the value of circulating gold coins or the monetary unit has the value of a certain circulating gold coin, yet other coins may be made of less valuable metal.

The gold specie standard arose from the widespread acceptance of gold as currency. Various commodities have been used as money; typically, the one that loses the least value over time becomes the accepted form. Once gold became an acceptable currency around the world, order was brought into world economics for a time.

The gold specie standard didn‘t come to an end in the United Kingdom and the rest of the British Empire until the outbreak of World War I, in which the economy in countries around the world suffered.

The US, however, did not suspend the gold standard during the war. The newly created Federal Reserve intervened in currency markets and sold bonds to offset some of the gold imports that would
have otherwise increased the stock of their paper money. By 1927 many countries had returned to the gold standard. As a result of World War 1 the United States, which had been a net debtor country, had become a net creditor by 1919.

No longer restrained by the stranglehold that high gold prices and the gold standard were having on
their economy, creating the Federal Reserve gave the US the opportunity to prime their economy for the massive growth that began in the 1940s by printing money and pouring it into the economy beginning in the 1910s. However, many economists believe that it was when the US decided to deviate from the gold standard and give its economy a boost by printing and circulating so much money
that they were, in fact, setting themselves up for the inevitable deflation that brought about the prolonged Great Depression in 1929.

Despite every country in the world doing away with gold in circulation as a currency for common business transactions, the leaders of nearly every country keep an abundance of gold on hand.

Source of Information : Ask About Gold By Michael Ruge