by Robert P. Murphy
To fully understand our current global monetary system, in which all of the major powers issue unbacked fiat money, it is helpful to learn how today’s system emerged from its earlier form. Before fiat money, all major currencies were tied (often with interruptions due to war or financial crises) to one or both of the precious metals, gold and silver. This international system of commodity-based money reached its zenith under the so-called classical gold standard, which characterized the global economy from the 1870s through the start of World War I in 1914.
Under a genuine gold standard, a nation’s monetary unit is defined as a specific weight of gold. There is “free” coinage of gold, meaning that anyone can present gold bullion to the government to be minted into gold coins of the appropriate denomination in unlimited quantities (perhaps with a small charge for the service). Going the other way, to the extent that there are paper notes or token coins issued by the government as official money, these can be presented by anyone for immediate redemption in full-bodied gold coins. Finally, under a genuine gold standard, there are no restrictions on the flow of gold into and out of the country, so that foreigners too can avail themselves of the options described above.