Gold
Standard is a monetary system in which a country's government allows
its currency unit to be freely converted into fixed amounts of gold and
vice versa. The exchange rate under the gold standard monetary system is
determined by the economic difference for an ounce of gold between two
currencies.
The
gold standard was mainly used from 1875 to 1914 and also during the
interwar years. The use of the gold standard would mark the first use of
formalized exchange rates in history. However, the system was flawed
because countries needed to hold large gold reserves in order to keep up
with the volatile nature of supply and demand for currency. After World
War II, a modified version of the gold standard monetary system, the
Bretton Woods monetary system created as its successor. This successor
system was initially successful, but because it also depended heavily on
gold reserves, it was abandoned in 1971 when U.S President Nixon
"closed the gold window."
