The gold standard is a monetary system where a country’s currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.
The gold standard is not currently used by any government. Britain stopped using the gold standard in 1931 and the United States abandoned the system in 1971. The gold standard was completely replaced by fiat money. The term fiat money is used to describe currency that is used because of a government’s order, or fiat, that the currency must be accepted as a means of payment. So for the U.S., the dollar is fiat money and for Nigeria it is the naira.
Today, the price of gold is determined by the demand for the metal, and although it is no longer used as a standard, it still serves an important use. Gold is a major financial asset for countries and central banks. It is also used by the banks as a way to hedge against loans made to their government.
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