THE GOLD STANDARD

To great extent, gold is a well-known form of money. Also in the history it has a general acceptance as a medium of exchange from the beginning. Unlikely to currency which does not have a intrinsic value, just a paper; gold always had a value.

Before the start of gold standard, silver had been used as a standard currency for centuries.However after a while this came to an end and gold became the standard. Difficulties with the gold standard started with the World War I.Countries had to leave the gold standard in order to be able to pay war reparations.


The Theory
In a gold standard system, countries tie their currencies to gold. Therefore, they prevent the problem of  "Nth currency". Since the countries peg their currencies to the gold, all countries stand equal to each other meaning that  no one has a privileged position in the international market.

Through this way, gold becomes the international currency. When needed, a single country can use gold as a defense mechanism of domestic currency. Gold system keeps exchange rate fixed.

However, using gold standard has both advantages and drawbacks. Since countries can not increase their money supply rapidly, gold standard prevents hyperinflation. On the other hand, gold standard puts constraints to the use of domestic monetary policy.