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Reasons Behind the Failure of Gold Standard

Gold bars lined with one another

The dollar has seen some dip during recent times, but gold has maintained its value over time. But did you know there was a time when the dollar and other currencies were backed by gold? The Gold Standard was the monetary system adopted by countries like Britain, the US, France, etc., before the 1900s, where a country’s currency was linked directly to gold.

 A nation that adhered to the Gold Standard established a defined gold value and used it to buy and sell products at that value.

No country currently uses the Gold Standard as Britain axed it in 1931. The US followed and stopped using it in 1933. But why did the world stop using the Gold Standard? Why did it fail? Let’s find out.

The Financial Crisis

One of the significant reasons major countries abandoned the Gold Standard was the financial crisis. During the financial crisis of the early 1900s after World War I, people were confused and were left hopeless by the economic instability. To counter this, they began to buy gold, which resulted in the government of several countries running out of gold reserves. England decided to stop using the Gold Standard and shifted to fiat money at these stressful times.

Gold Standard Reduces The Supply of Gold

Another apparent and common reason for not using the Gold Standard is that it can result in economic instability. When people buy more and more gold, it impacts the government’s gold reserves, resulting in another significant financial crisis or economic instability. The Gold Standard cannot prevent a financial crisis but rather proves as a catalyst for it.

Gold Standard Cannot Prevent Fiat Currency

Even if the countries adopted the Gold Standard, it still won’t prevent fiat currency from being used. People will still buy and sell goods in fiat money, although its value will be backed by gold. It’s bad because a government can print fiat money during an economic downturn, but gold cannot be created or produced. So, a more viable option is to stick to fiat currency.

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