What is the Gold Standard?
The gold standard is the practice of tying a nation’s economic system to a fixed value of
gold. The gold standard would then determine the value of every other commodity, since it would be valued relative to the price of gold, which set the standard in the economy. The practice reached its high point during the pre-war years in American and Europe, both of which had previously employed either a silver standard or a bimetallism consisting of gold and silver. The gold standard began to lose its luster in the second half of the century. The US no longer maintains the gold standard, having declared in 1971 that it would no longer cover the value of its currency with gold or any other commodity. The gold standard has not been in effect with any country since then. The demand for gold on the commodities market, however, remains strong for a variety of reasons including a deep set perception of its value. In fact, the term “gold standard” has entered the lexicon to mean something of high quality and prestige.
Gold Remains a Precious Commodity
Since the price of gold is no longer fixed by the government, its value fluctuates on the commodities market significantly. Like any other commodity – silver, platinum, oil – it goes up in price during times of high demand and down again when the demand diminishes, such as a recession. The market sets the price of gold, silver, platinum, and oil as it sets the value of the dollar in the foreign exchange market. At the same time, people continue to treat gold as a commodity apart from other commodities. People respond to gold differently from any other precious metal. They note its unique qualities such as the fact that it never rusts, or that it is rare, or that it conducts electricity. In other words, the value of gold on the commodities market does not express the value people place in it when they own it. All of which, in fact, would make gold the perfect commodity to serve as the standard for currency valuation.
How it Performs in the Commodities Market
One of the primary virtues of the gold standard during its primary years of institution, between the years of 1880 and 1914, was the effect it had on keeping inflation in check. Thus, tying the economy to a fixed price for gold helps maintain economic stability. Letting the commodities market set the prices for goods also allows a level of stability, however, it comes with far greater price fluctuation, leading to greater market inflation. One of its main drawbacks to the system was that it tied the government’s hands in many economic areas, leading to a higher unemployment rate compared to the period that followed. Since there is a greater value placed on high employment rates, even in the event of some rise in inflation rates, the chances of the gold standard or other anchoring mechanism to return appear to be slim.