CHARACTERSTICS OF GOLD STANDARD

A gold standard is a monetary system under which pure gold is the standard of value
for the currency of a country. In other words, a country's standard unit of exchange—a
pound, a dollar, or a franc, for instance—is pegged to or defined in terms of a set price for
gold. Under such a system, gold is central to the monetary system of the country as the
medium of exchange and the store of value.

A gold standard has eight distinguishing characteristics:

 The value of the principal unit of currency of a country on a gold standard is

measured in relation to a fixed and predetermined quantity of gold.
 Paper money and gold can be equally exchanged for each other at a legal
predetermined rate. This is known as inter-convertibility.
 Metal coins (other than gold) can be used only as token money. That is, the nominal
or face value of the coin must be greater than the intrinsic value of the metal in the
coin.
 Monetary authorities will accept gold bullion on demand and coin it or convert the
domestic currency into gold. A nominal service fee (or seigniorage) is charged to
cover minting costs while providing the government with revenue. The monetary
authorities will also exchange paper currency and nongold coins for gold on demand.
This is referred to as convertibility.
 International reserves are mostly held in gold.
 Individuals in the country are free to hold any amount of gold in bullion or coin.
 Individuals are free to import and export gold in any amount.
 The creation of paper money is linked to the amount of gold reserves held by the
central banking system.