Gold Standard System
my dear friends The creation of the gold standard monetary system in 1875 is one of the most important events in the history of the forex market. Before the gold standard was created, countries would commonly use gold and silver as method of international payment. The main issue with using gold and silver for payment is that the value of these metals is greatly affected by global supply and demand. For example, the discovery of a new gold mine would drive gold prices down. (For background reading, see The Gold Standard Revisited.)
The basic idea behind the gold standard was that governments guaranteed the conversion of currency into a specific amount of gold, and vice versa. In other words, a currency was backed by gold. Obviously, governments needed a fairly substantial gold reserve in order to meet the demand for currency exchanges. During the late nineteenth century, all of the major economic countries had pegged an amount of currency to an ounce of gold. Over time, the difference in price of an ounce of gold between two currencies became the exchange rate for those two currencies. This represented the first official means of currency exchange in history.
The gold standard eventually broke down during the beginning of World War I. Due to the political tension with Germany, the major European powers felt a need to complete large military projects, so they began printing more money to help pay for these projects. The financial burden of these projects was so substantial that there was not enough gold at the time to exchange for all the extra currency that the governments were printing off ;););)
The basic idea behind the gold standard was that governments guaranteed the conversion of currency into a specific amount of gold, and vice versa. In other words, a currency was backed by gold. Obviously, governments needed a fairly substantial gold reserve in order to meet the demand for currency exchanges. During the late nineteenth century, all of the major economic countries had pegged an amount of currency to an ounce of gold. Over time, the difference in price of an ounce of gold between two currencies became the exchange rate for those two currencies. This represented the first official means of currency exchange in history.
The gold standard eventually broke down during the beginning of World War I. Due to the political tension with Germany, the major European powers felt a need to complete large military projects, so they began printing more money to help pay for these projects. The financial burden of these projects was so substantial that there was not enough gold at the time to exchange for all the extra currency that the governments were printing off ;););)
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