In Economics, what does it mean to say that "A country's currency is backed by gold?

Question

Of what implications is it to an economy to back it by gold?

Answer 1

It means they have enough gold in reserve that equals the money they print

Answer 2

Gold is held for each country at the World Bank in New York City. Each country that can, backs it currency with the gold held there as proof that it can pay its debts if it has to. While not all countries can do this, those with good a good Economics can. While the United States has a huge debt of over 5 Trillion dollars world wide. The dollar is considered solid because the country has a large reserve of gold. Even though since 1933 Gold is no longer the standard in which the country bases it's economics locally, it is still the world wide standard for the dollar.

Answer 3

As several have pointed out, it means that the Govt prints currency of the amount, for which they have gold reserves available for exchange in case anyone wants to exchange their currency with gold.

Does it mean that the Govt can 'print currency' only of that amount for which it has gold reserves? Well, thats where economics comes in. Usually, a country would like to believe that people have confidence in its currency. Therefore, if the govt believes that everyone holding that currency will not come suddenly to its central bank, and ask for equivalent amount of gold, then it need not keep the exact amount of gold, as the currency it has printed. It can actually print more currency, than the gold it has. So, how much can it print, well, there comes the whole art of 'international finance'. Depends on other countries confidence; which in turn depends on a countries economy, military power, friends, enemies, the environment, natural disasters and so many other things.

So, modern economies do not rely on gold as the only 'asset' backing currencies, though they still do keep some reserve of gold, just in case.

Answer 4

Basically, it means that the governemnt promises to exchange currency into gold whenever it's required to do so. The government must therefore maintain gold reserves and cannot print tons money at will. Unstable currencies can build reputation and credibility by sticking to the gold standard. At the same time, the price of the currrency is closely tied to the worldwide price of gold. It also makes monetary policy less potent as a tool to influence the economy.

Answer 5

It means that each monetary unit (lets say a dollar) is backed by a certain amount of gold, that means that amount of gold is held in reserve for that unit and technically if you went to a bank with so many "backed" units they would be able to give you gold in exchange for the notes. It also means that the financial system can't create more units or notes without the gold to back it so money can't just be added to the system without real gold backing it up. The USA no longer has a precious metals back monetary system. We used to have them, and you can still sometimes find a $5 or $10 gold or silver certificate which looks like a US bill but comes from the time when our money was backed by gold & silver.

Answer 6

All countries have a printed currency that is easier to carry and handle than heavy and cumberson gold coin or bullion. However, the printed money must be "backed" by something worth the amount of money they print. Gold is a worldly standard, good in all countries of the world, therefore a country must have an amount of gold to balance this "paper"or promisary note or currency.

Answer 7

This means the country's curency can be trade for an equal amount in gold ounces. Check wilkipedia on gold standard.In the 1970's money was backed by gold, but once the u.s went off the gold standard, all countries have a floating rate. The U.S. money supply is controlled by the Feeral Resever System. On a tight monetary policy, Money supply is hrinked to curb inflation. On a loose, money supply is increased because economy grew and the demnd for money is greater.

Answer 8

Simple...it means that every cent a government has in circulation has a gold backing. In the US for example we work on the gold standard. Our money is backed in "full faith" by the US Mint which house a CRAP LOAD of GOLD in its Mints. There is actual physical GOLD that represents and backs up your money. Without the gold your money would be useless. I know it is confusing but think of it this way.....

If you give someone a Dollar and tell them that the dollar will buy them 2 apples ....then the dollar is backed by 2 apples. The US government is giving us (well we earn it unless one is rich then they give it to you) a dollar and saying it is worth $1 worth of gold.

They use gold because it is valuable and, believe it or not, fairly easy to obtain. What is the gold price like $370 per ounce? I hope that helps some...

Again here is wikipedia's take on the gold standard:

The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold.

Under the gold standard, currency issuers guarantee to redeem notes in that amount of gold. Governments that employ such a fixed unit of account, and which will redeem their notes to other governments in gold, share a fixed currency relationship.

Supporters of the gold standard system claim it is more resistant to credit and debt expansion. Unlike a fiat currency, the money backed by gold cannot be created arbitrarily by government action. This restraint prevents the artificial inflation by the devaluation of currency. This is supposed to remove "currency uncertainty", keep the credit of the issuing monetary authority sound, and encourage lending. Nevertheless, countries under the gold standard underwent debt crises and depressions throughout the history of its use.

The gold standard is no longer used in any nation, having been replaced completely by fiat currency. It is still in private use by private institutions in the supply of digital gold currency, which use gold grams as money.

Answer 9

The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold.

Under the gold standard, currency issuers guarantee to redeem notes in that amount of gold. Governments that employ such a fixed unit of account, and which will redeem their notes to other governments in gold, share a fixed currency relationship.

Supporters of the gold standard system claim it is more resistant to credit and debt expansion. Unlike a fiat currency, the money backed by gold cannot be created arbitrarily by government action. This restraint prevents the artificial inflation by the devaluation of currency. This is supposed to remove "currency uncertainty", keep the credit of the issuing monetary authority sound, and encourage lending. Nevertheless, countries under the gold standard underwent debt crises and depressions throughout the history of its use.

The gold standard is no longer used in any nation, having been replaced completely by fiat currency. It is still in private use by private institutions in the supply of digital gold currency, which use gold grams as money.

Answer 10

The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold.

Under the gold standard, currency issuers guarantee to redeem notes in that amount of gold. Governments that employ such a fixed unit of account, and which will redeem their notes to other governments in gold, share a fixed currency relationship.

Supporters of the gold standard system claim it is more resistant to credit and debt expansion. Unlike a fiat currency, the money backed by gold cannot be created arbitrarily by government action. This restraint prevents the artificial inflation by the devaluation of currency. This is supposed to remove "currency uncertainty", keep the credit of the issuing monetary authority sound, and encourage lending. Nevertheless, countries under the gold standard underwent debt crises and depressions throughout the history of its use.

The gold standard is no longer used in any nation, having been replaced completely by fiat currency. It is still in private use by private institutions in the supply of digital gold currency, which use gold grams as money.

Answer 11

Any currency "backed by gold" has a dollars worth of gold at current value physically held in it's possession for every dollar in circulation. To my knowledge no nation now does this though there are some gold coins in circulation in troy ounce denominations. The advantage ? You're money would indeed be "as good as gold".