What Is a Gold Standard?

Before 1974, U.S. dollars were backed by gold. This meant that the federal government could not print more money than it could redeem for gold. While this constrained the federal government, it also provided citizens with a relatively stable purchasing power for goods and services.

While Australia had remained on the path of the sterling system (silver standard based on effectively the same principles), in 1967, Australia abandoned the sterling standard and pegged the Australian dollar to the United States Dollar at a rate of 1 AUD = 1.12 USD. The USA abandoned convertibility between USD and Gold in 1974, though the Australian dollar remained pegged to the USD until 1983, after which it became a floated currency under new principles of value determination.

Today’s paper currency has no intrinsic value. It is not based on the value of gold or anything else. Under a gold standard, inflation was really limited. With floating value, or fiat, currency, however, some countries have seen inflation reach extremely high levels—sometimes enough to lead to economic collapse. Gold standards have historically provided more stable currencies with lower inflation than fiat currency.

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