If you invest in and collect gold, chances are you have heard of the term “gold standard.” There are several ways to interpret gold standard. It can refer to a freely competitive monetary system in which gold acts as the primary medium of exchange; a fixed monetary regime under which a government’s currency may be freely converted into gold; and more. As you can see, there are more than one iteration of the gold standard since day one, and they are on a good-to-know basis. Don’t worry. This post will explain each type of gold standard in detail.

Limping Or Partially Convertible Gold Standard

In the past, the bimetallic coin standard was adjusted so that mints could allow free coinage of one metal (e.g. gold) but ceased to freely coin another (e.g. silver). This gave birth to limping standards. Since silver coins were not removed, they continued to circulate along with gold coins. Hence, the silver coinage is limping on. With that in mind, partially-convertible gold standard is the modern incarnation of limping standard. It means that a central bank has imposed conditions on who could convert their paper banknotes for gold. The U.S. ceased to allow businesses and private individuals from converting their notes into gold in 1934. Issuers felt that the partially-convertible standard was easier to maintain as they helped reduce the infrastructure costs of maintaining universal convertibility.

Gold Exchange Standard

Gold exchange standards take the concept of gold conservation up to another level. Institutions that issued paper money could no longer redeem their notes with raw bullion. They were obligated to offer notes of a second-party issuer, which were on a gold bullion or gold coin standard. Several nations adopted the Pre-1933 gold exchange standard in the 1800s and early 1900s. These nations included India and the Philippines. A famous example of this gold standard was the Bretton Woods system. It started after the Second War World and remained in effect until 1971. In addition, the U.S. Treasury had to keep its promise of redeeming its notes directly for gold during that time.

Gold Bullion Standard

If gold coins were not frequently used in trade, would it be possible to stop minting them altogether and allow those coins to remain on a version of the gold standard? This was the basic concept that backed the gold bullion standard. David Ricardo, a famous English economist, first conceived the standard in 1816. Under a gold bullion standard, an issuer that issues paper money was required to redeem its banknotes with a specific amount of raw bullion, but not with gold coins or specie.

When the gold bullion standard was adopted, the costs of running payment systems were lower. A combination of paper money and token coins replaced gold coins, which were pushed out of circulation. This ensured that gold was conserved and put toward better uses.

There have been many gold standards over the last thousand years. Each iteration pulled with it a reduced role for the monetary metals. With gold being diverted to better uses, there was a net gain for society. It is interesting to note, that while gold played a smaller role in the past, a nation’s ability to purchase monetary units continued to be tied to gold, throughout this evolution. Its purchasing power was not dictated by an arbitrary force.