Gold standard

The gold standard was a method where governments would back their currency/bonds/notes at a fixed price to a fixed amount of gold. This would essentially set the value of the currency, for example: if country A set the price at 1$ per 1/50th of an once, and country B would set the price at 1$ per 1/100th of an once, the currency from country A would be twice as valuable as country B. Prior to the use of the gold standard there were other monetary standards that were set on other precious metals, for example silver standard were quite common in the 1800's. When governments used both gold and silver standards this was known as bimetallism.

The primary idea behind the use of the gold standard rested on the theory that inflation is caused by an increase of the quantity of money that is in circulation and that by fixing the price would generate certainty in future buying power, trade and capital investments. In essence this was an attempt to remove uncertainty between currencies and trade markets.

The gold standard is generally considered to have started in the early 1800's even through there was a silver standard in place. During this time there was a small percentage of silver traded so the bulk of the valuation still relied on gold. A true gold standard was implemented in 1900 was the passing of the Gold Standard Act. The gold standard was quickly dismantled in the US in 1933 when President Roosevelt outlawed private gold ownership. The US then partially returned to the gold standard in 1946 with the Bretton Woods System which was a fixed exchange rate for gold at 35$/ounce for other governments to sell gold to the US. In 1971 the end of the gold standard and the relationship between currency and commodity was removed by President Nixon who removed the fixed gold price and allowed gold to trade freely.