Why is the value of money determined by gold? Detailed answer

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Why is the value of money determined by gold? Detailed answer

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Why is the value of money determined by gold?

Metal coins or painted pieces of paper, which we think of as money, are in fact only symbols. But they are also real. The money is backed by a stock of precious metal held by the state that issues the money. The standard for measuring the value of money common in the civilized world is gold and silver. They are quite rare and retain their value, but their stocks are sufficient to meet the needs of the market.

In other words, paper money and coins issued by the government as money were accepted as having value because they were backed by the amount of gold and silver held in the treasury. In 1821, Britain introduced monometallism (that is, the use of one metal) as the basis of its monetary system. Gold was accepted as the official currency. By 1914, gold had become the unit of measure for almost all currencies in the world.

With a standard measure of value, countries could easily trade with each other. United States dollars, francs from France, German marks had a fixed value in gold. By 1933, most countries were off the gold standard. But many currencies, including the US dollar and the euro, are still determined by the set price of gold.

Gold is very important in international trade. The government buys and sells gold bars. Part of the gold is used to pay international debts, the other part is kept. The stored gold is called the gold reserve.

Author: Likum A.

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