Gold Standard

Under the gold standard, the amount of money a country could issue was limited by its gold reserves. Exchange rates between countries on the gold standard were effectively fixed, since each currency was worth a set amount of gold.

The classical gold standard operated from around the 1870s until the First World War, with the United Kingdom at its centre. It was partly restored after the war but collapsed during the Great Depression; the United Kingdom left it in 1931 and the United States ended domestic gold convertibility in 1933. The Bretton Woods system later linked currencies to the dollar, which was convertible into gold for central banks until 1971.

For example, under the gold standard, a country that imported more than it exported would lose gold to other countries, reducing its money supply and pushing down prices until trade rebalanced.

Supporters argued the gold standard limited inflation and government overspending. Critics argue it made economies rigid, prevented central banks from responding to recessions and contributed to the severity of the Great Depression. No country uses it today; modern currencies are fiat money.