The Gold-Standard was a monetary system in which the participating countries made a commitment to fix their currencies in terms of gold. It was the most famous monetary system in history, but is no longer in use.
The gold-standard was first adopted by the United Kingdom. In the 1790s, there was a great shortage of silver in the UK and so it started a major restructuring program through which gold coins were introduced. In 1844, the Bank Charter Act was introduced according to which the Bank of England notes, backed by gold, were made the legal standard in the country. The United States at that time was following a bi-metallic standard, which is the use of both gold and silver. But in 1873, the Fourth Coinage Act was passed, through which the gold-standard was embraced. Following these two major nations, many other countries also adopted the gold-standard such as Germany, France and Italy. The time period from 1880 to 1914 is known in history as the classic gold-standard. It was a time when most nations of the world had moved towards the gold-standard and there was much economic growth throughout the world.
The gold-standard was used to regulate the demand and supply of a country’s currency in the long term. It helped in keeping the money supply stable. It was also used for determining the exchange rate, that is, the value of a country’s currency in terms of another currency. This lead to the use of fixed exchange rates throughout the world, and meant that currencies always moved together, which further lead to a reduction in economic uncertainty. There were other benefits of the gold-standard as well. Inflation was controlled because the governments could not simply issue currency and float it in the market to create inflationary pressures.
There were also certain disadvantages which lead to the abolishment of the gold-standard. The fixed exchange rate system meant that monetary shocks in one country were transmitted to other countries as well. This lead to changes in the economy, money supply and price levels in other countries. While there was long-term stability, prices were sometimes highly unstable in the short run. Moreover, for the gold-standard to work perfectly, the central banks of participating countries had to follow a certain set of uniform rules, which proved to be quite difficult. Many countries did not follow the rules, and therefore, did not change their discount rates effectively. Unemployment was also relatively high in the period of the gold standard. And finally, the cost of producing gold was a burden on many economies.