Gold Standard

However, it was the use of gold coins that was the rage in the era before the paper money was introduced. Gold and silver coins were preferred as they had value in themselves and were relatively stable. A person could be almost certain that he would be able to buy the same basket of goods with a gold coin even after a certain period of time, say two months.

The need for silver coins arose from the fact that a person could not buy everything with gold coins as some articles were too cheap to be replaced by gold. For example, a person wishing to buy ink for his pen might think that a gold coin was too much to pay for it and would thus pay in silver instead. This usage of gold and silver coins as money is termed as “bimetallism” and was commonly practiced.

The gold standard was quite stable and was highly regarded throughout the world. It paved the way for international trade as people around the globe have a mutual desire for gold. Moreover, the traders could melt the gold coin and sell it for its gold content if the need ever arose.

Countries knew the value of their money by comparing it to gold. For example, if the U.S Dollar was worth an ounce of gold and the British Pound was worth half ounce; then the British would have to pay Twenty Pounds for an item that was worth $10 in the U.S. Thus, the departure from the gold standard created a dilemma as foreign countries now no longer knew the real value of their money and whether they were being cheated in trade by another country or not.