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The gold standard is a monetary system that measures the relative value of a currency against a specific amount of gold.
It was developed in England in the early 18th century when the scientist Sir Isaac Newton was Master of the English Mint. By the late 19th century, the gold standard was used throughout the world.
The United States was on the gold standard until 1971, when it stopped redeeming its paper currency for gold.
gold standardan INTERNATIONAL MONETARY SYSTEM in which GOLD forms the basis of countries’ domestic MONEY SUPPLY and is used to finance INTERNATIONAL TRADE and BALANCE OF PAYMENTS deficits.
Under the gold standard, EXCHANGE RATES were rigidly fixed in terms of gold. (The gold standard was widely adopted in the 19th century and operated down to the early 1930s.) In theory, the gold standard provided an automatic ADJUSTMENT MECHANISM for eliminating payments imbalances between countries: deficits were financed by outward gold transfers that reduced the domestic MONEY SUPPLY. This in turn deflated (see DEFLATION) the domestic price level, making IMPORTS relatively more expensive and EXPORTS relatively cheaper, thereby reducing the volume of imports and increasing the volume of exports. Surpluses were financed by inward gold transfers, which increased the domestic money supply. This in turn inflated (see INFLATION) the domestic price level, making imports relatively cheaper and exports relatively more expensive, resulting in a fall in the volume of exports and an increase in the volume of imports. In this way, both deficits and surpluses were removed and BALANCE OF PAYMENTS EQUILIBRIUM restored. In practice, however, countries found that a combination of rigidly fixed exchange rates and the complete subordination of domestic economic policy to the external situation was too onerous and opted for more flexible arrangements. See FIXED EXCHANGE RATE SYSTEM, INTERNATIONAL MONETARY FUND.