gold standard

Popular Terms
System of backing a country's currency with its gold reserves. Such currencies are freely convertible into gold at a fixed price, and the country settles all its international trade transactions in gold. Between 1900 and 1914 world's major economic powers were on gold standard, but could not maintain it during first World War (1914-18) and, except the US, finally abandoned it in 1931 during the Great Depression (1930-40). The US too abandoned it in 1971 to join the floating exchange rate system which is the international monetary-system as it exists today. The gold standard has never worked satisfactorily in controlling inflation or maintaining equilibrium in international transactions.
Its major drawback is that it restricts a government's ability to control money supply, and makes a healthy economy highly susceptible to the conditions of inflation or depression of its trading partners.

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