Why Gold as a Standard?

For any currency to be viable, it had to have the following 2 features among others: –

More about Stock-to-flow ratio and hardness here.

Both these were satisfied by the precious metals, which were actually the go-to currency. Take Gold for instance. The ratio of existing gold stock(the STOCK) to the actual amount of gold mined(FLOW) in a year grew over time as there is a limit to the rate at which gold forms. As a result it had higher Stock-to-flow ratio. The difficulty to produce more units of gold made it HARD too. As such it qualified to be a viable currency ie. Its value could go on being stable for a long time without dropping, unless we found large volumes of untapped gold!

Gold was therefore The King Of Currencies. But gold was hard to divide, it gave way to the formation of bank notes. Every modern currency was pegged to gold ie. to generate a particular amount of a currency note, there had to be sufficient gold set aside. This was the basic idea behind The Gold Standard.

Gold has been a standard since the early 19th century.

In other words, the value of a particular currency was linked directly to gold. For instance, if a country, ABC sets the price of its currency Q, at 1 unit per 10 milligram of gold then, the value of Q will be equal to that of 1/10th of a milligram of gold.

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Shreesha S
Shreesha writes about Business, Finance and Tech for The Snippets Journal. He is also the Founder and Head of Content Development.
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One comment

  1. […] this value was represented by The Gold Standard(read more about the concept behind gold standard here).Under Gold Standard, though each country issued their own paper currencies, they had to be backed […]

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