BEE Partner, South Africa Economy Watch

In its earliest and simplest forms, the gold standard meant that the money in circulation, including the money the government minted, consisted of gold coins. When the US officially joined the gold standard in 1879, the value of the dollar was set as equal to the value of 23.22 fine grains of gold, where 480 fine grains made a fine troy ounce. This was equivalent to $20.67 per ounce.

Under the gold standard, the constraint on the creation of bank money posed by reserves is critical. Bank money consists of notes issued as claims to real money, that is, to gold or silver coins, money with intrinsic value. But at any time, most of the public would prefer to use the more convenient paper money, provided they are confident that they can convert the (intrinsically worthless) paper to gold at a moment’s notice. For this purpose, reserves are kept in proportion to the note issue. Read the rest of this entry »