What is the gold standard?

The gold standard is when a currency is either literally made out of gold, or can be exchanged directly for a set amount of gold. Money can either be commodity money—which is a physical thing that would be valuable even if it weren’t money—or fiat money—something like paper that is only valuable because it has been stamped as money. Today basically all money is fiat money, but historically, commodity money has been much more popular.

In particular, many countries and kingdoms have used gold as their currency. Originally the gold standard meant quite literally that money was made out of gold coins, but as time went on, it came to mean that paper money could be taken to a bank and exchanged for a set amount of gold.

The main benefit of the gold standard was that it created trust in a country's currency. If your money wasn’t actually made of gold, you knew that you could take it somewhere to have it converted into gold. The gold standard was also very good for tying the hands of cash-strapped kings and governments. With a fiat currency it’s fairly easy for a government to print more money when it needs it to fight a war or build a new palace. But printing money willy nilly can be dangerous, especially if it leads to a loss of trust in the currency. With the gold standard, rulers who wanted more money would have to get it in a more respectable way—mining it, buying it or stealing it. This created some brutal struggles over gold, but it also helped keep away inflation.

Over time the system became unsustainable.¹ As the world economy expanded, more and more gold was needed to keep up with the increasing amounts of economic transactions which required money. The link between money and gold was completely broken in the 1970s, and now money is not backed up by gold or any other commodity. Its value instead comes from the promises that governments and people make to each other and our trust in those promises.