What is the gold standard ?

The gold standard (or “Gold Standard”) is first and foremost a monetary system, that is to say a set of rules around money, its value, its exchanges and his show. Under the gold standard, a monetary unit is defined according to a fixed weight of gold. In other words, the principle was that a dollar, a pound sterling or a franc for example, was worth a defined number of grams of gold.

In this system, commercial exchanges are carried out with gold and the exchange rates are fixed, since each currency is fixedly indexed to the same standard.

To be able to issue banknotes, countries were subject to the quantity of gold they had in reserve. To produce With the Gold Standard, central banks were therefore theoretically not free to issue the quantity of money they wanted.

If the gold standard is a must-have in history and economics books, it did not survive very long and went through more complicated periods. But it nonetheless remains a monetary system that reigned over a large part of the world at the end of the 19th and beginning of the 20th.

The first steps of the gold standard

The gold standard came into existence at the end of the 19th century, in the 1870s, while international trade was growing and banking crises were accumulating due to too many notes being issued.
For countries, it is then a question of moving from bimetallism to monometallism. While banknotes could previously be converted into gold or silver, the gold standard effectively limits the conversion of banknotes and gold coins.

The currencies of the main world powers then enter this system: dollar (United States), pound sterling (United Kingdom), Reichsmark (Germany), Latin Union (France, Belgium, Italy and Switzerland), etc. Not all of them adopted it at the same time, the Bank of England being a precursor at the beginning of the century, followed by the Germans in 1871, the countries of the Latin Union, the United States, the Scandinavian countries, etc. . to India in 1898.

The beginnings of the gold-based system

With the First World War, the gold standard regime was undermined. The central banks of countries at war needed to print far more money than their gold reserves would allow. This was to finance the war effort. They then decided to make their currency inconvertible into gold, putting an end to the gold standard as it had existed until then.

The return of the gold standard, in the form of the gold exchange standard system

After the First World War, with a devastated economy in need of a new order, the States met in Genoa in 1922. Agreements were then made, restoring the convertibility of currencies into gold, but in a different form to compensate for the depletion of gold reserves.
Thus, countries that have the capacity can maintain the gold standard, while others can adopt the gold exchange standard, or Gold Exchange Standard. The latter then have the possibility of converting their currencies into reference currencies, which are themselves convertible into gold. When the Genoa Accords were signed, these gold-indexed currencies were the dollar and the pound sterling.

The official end of the gold standard with the Bretton Woods agreements

If the monetary system of the gold standard and the gold exchange standard has had many advantages for international trade, it nonetheless remains very restrictive. To deal with the crisis of 1929, several countries decided to emerge from it. The objective then is to better control their exchange rates and avoid excessive price fluctuations, in order to re-establish a more stable economy. The Second World War then completely destroyed the gold standard.

The powers are not abandoning the idea of ​​facilitating international trade by indexing their currencies to a standard. At the end of the war, they met to sign the Bretton Woods agreements, which would remain valid until 1971 (the year in which the United States abandoned the indexation of its currency to the precious metal).

The central element of this international monetary system is the indexation of currencies to the dollar, which then remains the only currency convertible into gold (one ounce of gold equivalent to 35 US dollars). All international trade between the signatory countries is then carried out in dollars.

In a current monetary system where rates are floating, we see the gold standard as a way of making the economy more stable. The creation of money is in fact limited to gold reserves, causing prices to vary very little and preventing galloping inflation.

This indexation on gold also made it easier to rebalance trade balances¹. This is explained by a fairly simple mechanism in theory: a country which is in a trade deficit (which imports more than it exports) takes gold out of its central bank. It must then reduce its monetary emission, which leads to a fall in prices. This makes its products more attractive for export, which allows it to sell, and therefore to bring gold back into its reserves. The same mechanism happens in reverse when a country finds itself in surplus.

What constitutes the strengths of the gold standard regime is also what led to its downfall. Indeed, since the central bank is limited in its issue of coins and notes, it can hardly regulate the domestic economy, for example to deal with a recession.

It should also be noted that the balance of the balance was not automatic: certain countries preferred to keep their gold reserves when they were in surplus, rather than produce money, with the aim of to avoid inflation.

A gold standard system can also increase the unemployment rate in a country. Indeed, in the event of massive outflows of gold, and consequently of a monetary contraction (= drop in the quantity of money produced), this means being able to lower wages and prices at the same time. History has shown that this is not always what happened and that we instead faced a drop in production, leading to more unemployment.

Another problem directly linked to gold metal: it is not equitably distributed around the world. Gold-producing countries were thus advantaged and had increased control over trade in this monetary standard.

Given the problems it generates, the gold standard system does not seem ready to resurface. In 2010 for example, while the president of the World Bank raised the subject, the Banque de France expressed its opinion: the return of the gold standard was considered “very dangerous and destabilizing”². But it must be recognized that some economists and politicians see this system as a way to stabilize the economy and find a balance between the real economy and the monetary system.

However, disagreements between countries, and even within a country, do not really favor the reestablishment of this gold standard.

Is gold banned from the economy ? Far from it: to this day it remains a safe haven, allowing you to invest with little risk and diversify your assets. This is all the more interesting since the purchase of gold, but also of silver bars and coins, is accessible to everyone. No need to allocate a large budget to make your first investments in precious metals. The amount to pay depends on the quantity of gold or silver contained in the object (bar, bullion, investment coin) and the price of the precious metals in question. With bars weighing a few grams for example, anyone can decide to dedicate part of their savings to investing in a precious, reliable and tangible metal.