What is the Gold Standard?

Here is a short video produced by ‘One Minute Economics’ explaining the beginnings of gold minted for trade, the ‘Gold Standard’ and it’s eventual replacement with fiat currencies in 1971.

Almost 2600 years ago, the first gold coins were minted and used for trade. Later on, people started storing there gold in well guarded vaults, and bought goods and services using the ‘receipts’ given to them by those running the vaults. Pieces of paper they could always exchange for real gold. Thats how paper money first appeared and things evolved from there.

Initially, most currencies were pegged to gold directly. As the name ‘Gold Standard’ suggests. People could walk into a bank, and exchange a piece of paper money – to gold.

After 1945 however, this changed. Currencies were pegged to the Dollar, which was pegged to Gold at a rate of $35 per ounce (OZ). Individuals were no longer allowed to exchange paper money to gold, but central banks were. However, countries such as France, ended up no longer trusting the US Dollar, and started converting their Dollars to physical gold.

The gold reserves of the US were getting depleted quickly. So President Nixon stopped allowing that. He took the United States, and thereby the world, off anything even resembling a Gold Standard in 1971.

At this point, the money we use isn’t even backed by anything tangible. Fiat currencies as they’re called, are basically backed by confidence.

The dollar is backed by the confidence people have in the US, the British Pound by peoples confidence in the UK, and so on. The value of one currency compared to another, therefore fluctuates continuously. Confidence driven supply and demand , if you will.