eli5 What was the Gold Standard?
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It originally was a system by which countries set the value of their currency to an specific amount of gold. For example $100 might equal an oz of gold. So that it was easy to understand the value of your currency to another country.
In common vernacular, it simply means “the best” of something of which all derivatives strive to be. For example the gold standard vacuum cleaner would be a brand or model so widely accepted as the best that all companies strive to build their vacuum to meet or beat it.
Put simply when the Gold Standard was in use, the value of a currency was backed up by physical gold stored in vaults. Back then you would literally be able to go to a bank and trade your banknotes for literal gold.
How do you define what value a currency has?
Money only has value because everyone chooses to agree that money has value, otherwise it would just be fancy paper and pieces of stamped metal.
Ancient coins were made of Gold and Silver because that metal had universal value. So if you had a Romain coin, regardless of whether you were a Roman or not, at least the coin had Gold in it so it had value wherever you were.
But throughout history the amount of actual Gold and Silver in coins was reduced and replaced with metals of lesser value to stretch out the amount of currency, to the point where today coins are made of metal with essentially no value. If it wasn’t for the fact that modern coins were legal currency, the actual metal in them would be effectively worthless.
The Gold Standard refers to the fact that money used to be tied to the value of Gold.
When paper money was first created every dollar that was printed represented an amount of Gold that the treasury held in reserve, at least in theory. That’s why the English Pound Sterling is called that, a British pound once represented the value of 1 pound of sterling silver.
But that hasn’t been true for a very long time.
Modern currencies are Fiat currencies meaning that their value is tied to the economic strength of the nation not gold held in reserve. This was first implemented in the 1970s in the US by the Nixon Administration.
Many hold the belief that if we were to return to the Gold Standard currency would be more stable, we’d have less inflation, Governments couldn’t literally print money to solve problems, and there would be less overall risk in the economy.
But most economists believe that this is total non-sense, the Gold Standard wasn’t really enforced for most of the 20th century since WW1 anyway.
It is what makes money have value.
In the old days, if the country (US in this case) had 100.000.000 in gold, it would only print 100.000.000 in dolar bills.Every bill in circulation was backed by something of real value. (Gold in this case.)
However, this standard was abandoned and it allowed to print more money.
If there are “aid packages” created by a government, it is often just freshly printed money that previously didn’t exist.It might seems nice to get free money, however, in the long run, this makes the currency less valuable (i.e. inflation) as nothing real of value is behind it.
Offcourse, other countries do this too, so relatively with them it is not that relevant.
Just be aware, some countries, such a Switzerland, do the opposite and still have 90% of their currency backed up by something of real value, which ensures their currency stays strong and even now, with all that is going on in the world, they see relatively minor inflation compared to other countries.
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