The gold standard was a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. The countries maintained these fixed prices by being willing to buy or sell gold to anyone at that price.
It is exactly this price stability that makes the gold standard superior to fiat currency. In fact, this period proved that deflation does not always lead to depression. There was a huge expansion of trade and production during the gold standard era and yet deflation in the price level ruled the day.
One of the reasons was the supply problem with gold. Since the gold price was fixed by central banks, the increased demand led to a corresponding decline in the price, which was exacerbated by quickly rising gains in global production and trade. Thus, we saw a period of deflation and real income growth.
The classic gold standard period was far from perfect, financial panics still appeared. For example, the U.S. experienced The Panic of 1907, whereby stocks got hammered and banks went belly up. It was one of the primary motivating forces behind the establishment of the Federal Reserve Act of 1913.
But the gold standard era ushered in a degree of global monetary cooperation and a period of rapid growth the world had never witnessed before.
The cornerstone of this system was built on faith … faith that governments and their central banks would make the necessary adjustments to maintain currency parities.
The above article is written in part by author, Jack Crooks who writes for Money and Markets.com.
Anthony DiChi,
Your friend in Forex Currency Trading, FX Information and Forex News at TradeCurrencyNow