The gold standard required countries to use monetary policy to keep exchange rates fixed and thus to allow prices, output, and employment to vary as required by the movements of gold and the country’s exchange rate. (A history of the Federal Reserve, volume 1, 1913–1951. Allan H. Meltzer, 2003, The University of Chicago Press. ISBN 0-226-51999-6. Introduction, page 5.)

What established fact is being invoked here? Can you cite a reference that provides instruction about this result? Thank you.


1 Answer 1


This is required just due to the simple definition of what gold standard is. For a monetary arrangement to qualify as gold standard money has to be convertible into gold. Hence central bank or some other government body must be always prepared to convert notes into gold. That is part of both the dictionary and economic definition of how it works.

To see why this requires fixed exchange rate lets say that this gold conversion is set in US such that $\\\$1$ converts into $1$ gram of gold. Now suppose EU would set its conversion rate to $1e = 2g$ of gold. If the exchange rate would be anything else than $E=\frac{\\\$}{e}=2/1$ the gold standard would eventually have to collapse in long run.

For example if exchange rate $E$ would be $1$ (i.e. $1EUR=1USD$) then everyone would take their dollars convert them to euros demand gold from European Central Bank to the point when either it would left without any gold to support the gold standard or it would change the exchange rate. If the exchange rate would be higher than $E=2$ opposite would happen. Consequently, under gold standard maintaining fixed exchange rate is necessary otherwise it cannot survive due to the fact that under gold standard notes must be convertible into gold.

  • $\begingroup$ That is, effectively countries under the gold standard are all using the same money? $\endgroup$ Commented Aug 5, 2020 at 15:58
  • $\begingroup$ @user12406990 essentially yes, that’s one way of thinking about it. Of course, reality is little bit more nuanced but yes. In fact EU euro-zone and euro has been by many economic researchers chiefly by Eichengreen compared to gold standard. There is some more nuance to it, that’s beyond a scope of a comment, but the comparison is apt. $\endgroup$
    – 1muflon1
    Commented Aug 5, 2020 at 16:01
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    $\begingroup$ Thank you very much for the clear answer. $\endgroup$ Commented Aug 5, 2020 at 17:29
  • $\begingroup$ @1muflon1 Does the gold standard require fiscal transparency as a condition? In other words, that governments may not print "new" money without publicly declaring it, nor "lie" about how much gold they actually have in reserves? (E.g., they cannot claim that they happened to randomly "discover" some new tons of gold somewhere and print new money because of it) $\endgroup$
    – ManRow
    Commented Mar 10, 2022 at 23:04
  • $\begingroup$ @ManRow 1. what you describe is not fiscal transparency since we are not talking about real gov revenues and expenses. Creating new money would be monetary activity not fiscal activity. 2. Government could lie about how much gold it has in reserves but they did not even need to lie. There is no requirement to have enough gold to make all banknotes convertible in gold standard. In fact probably governments did not had enough gold. Otherwise it would be hard to explain situations such as 1933 bank holiday by Roosevelt which was literally done to prevent bank run on Fed gold, if it would be $\endgroup$
    – 1muflon1
    Commented Mar 11, 2022 at 6:08

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