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What Is the Gold Standard?
With Russia, Brazil India and China forming the BRIC nations and now including Saudi Arabia, IRAQ, IRAN, SINGAPORE and AFRICA. They have all declared that each nation has large volumes ( trillions ) of gold and precious metals. President Vladimir Putin said on Wednesday that the BRICS countries – Brazil, Russia, India, China, and South Africa – are currently working on setting up a new global reserve currency.
“The issue of creating an international reserve currency based on a basket of currencies of our countries is being worked out,” he said at the BRICS business forum.
According to the Russian president, the member states are also developing reliable alternative mechanisms for international payments.
Earlier, the group said it was working on establishing a joint payment network to cut reliance on the Western financial system. The BRICS countries have been also boosting the use of local currencies in mutual trade.
This will have a major impact on the international trade and now THE USD will no longer be the reserve currency, the world is measured against.
What Is the Gold 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 $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.
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 1973.12
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. 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.
- Before being a medium of exchange, gold was used for worship.
- With its large discoveries of gold, England became the first country to implement the gold standard.
- The Bretton Woods agreement established that the U.S. dollar was the dominant reserve currency and that the dollar was convertible to gold at the fixed rate of $35 per ounce.
- In 1971, President Nixon stopped the convertibility of the U.S. dollar to gold.