GOLD STANDARD, a country is on the gold standard when its money—paper bills, silver coins, etc.—is redeemable on demand at a fixed weight of fine gold for each monetary unit. For example, in the United States previous to March, 1933, a five dollar bill was convertible into 129 grains of fine gold on demand. Accordingly its value in terms of other goods or services changed only insofar as the amount of goods or services purchasable by 129 grains of gold changed. Under normal conditions, this insured a fairly stable medium of exchange, which is a basic require ment for the efficient operation of any advanced economic system.
To maintain the gold standard two things are necessary. The currency authority—usually a government—must purchase at a fixed price and coin free of charge all gold brought to it. It must also sell at the same price all gold demanded of it. Gold there fore remains the one commodity in a gold standard country which registers no change in price, measured by monetary units.
The government can easily fulfill its pledge to purchase gold at a fixed price, as it can print paper money for this purpose. The main difficulty in the operation of the gold standard arises when the banks, as agents of the government, are called upon to redeem in gold large amounts of paper currency or other kinds of money. As the gold held in reserve for such emergencies is normally only a small part of the face value of the paper and other non-gold currency in circulation, a sustained "run" on gold will eventually force the suspension of the gold standard.
The gold standard was first legally introduced in Great Britain in 1816. The United States adopted the gold standard in 1873.