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The Rise and Fall of the Gold Standard

The gold standard was a monetary system in which the standard economic unit of account was based on a fixed quantity of gold. Under this system, a country's government allows its currency to be converted into a specific amount of gold and vice versa. The primary appeal of the gold standard was that it was designed to ensure the value of a currency, control inflation, and provide a stable framework for international trade. Because the money supply was tied to the government's gold reserves, it prevented the authorities from printing excessive amounts of paper money and devaluing the currency.

The classical gold standard era is generally dated from the 1870s to the outbreak of World War I in 1914. During this period, many of the world's major trading nations, led by Great Britain, adhered to this system. It fostered price stability and fixed exchange rates between currencies, which greatly facilitated international commerce and investment. However, the system was also very rigid. It limited a government's ability to use monetary policy, such as adjusting the money supply, to combat economic downturns. This lack of flexibility meant that countries often had to endure long periods of deflation and high unemployment during recessions.

The gold standard largely collapsed during World War I, as nations suspended convertibility to finance their war efforts by printing more money. It was briefly and unstably revived in the 1920s, but the Great Depression of the 1930s delivered the final blow. Countries abandoned the gold standard one by one to pursue more flexible monetary policies aimed at stimulating their economies. Today, no country uses the gold standard, and modern economies operate on a system of fiat money, which is currency that a government has declared to be legal tender but is not backed by a physical commodity.