By Dr Masimba Mavaza| There are several types of commodity-backed money, including the gold standard. Under the gold standard, the value of a currency is directly linked to a specific amount of gold. Countries that use the gold standard allow for the exchange of currency for gold at a fixed rate. The gold standard is a monetary system backed by the value of physical gold. Gold coins, as well as paper notes backed by or which can be redeemed for gold, are used as currency under this system. The gold standard was popular throughout human civilization, often as part of a bi-metallic system that also utilized silver. Most of the world’s economies have abandoned the gold standard since the 1930s and now have free-floating fiat currency regimes.
**How the Gold Standard Works**
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 agree to convert paper money into a fixed amount of gold. By holding the piece of paper called ZIG, you will be holding a value of gold. Gold is represented by ZIG; in short, ZIG is the representative of actual gold. The gold standard is a fixed monetary regime under which the government’s currency is fixed and may be freely converted into gold. It can also refer to a freely competitive monetary system in which gold or bank receipts for gold act as the principal medium of exchange; thus, the gold standard is a monetary system in which the value of a country’s currency is directly linked to gold.
With the gold standard, Zimbabwe agrees to convert paper money into a fixed amount of gold. Since we now use the gold standard, it sets a price for gold, and it buys and sells gold at that price. That fixed price is, in turn, used to determine the value of our currency. For example, if we hypothetically set the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold. We must remember that England was the first country to officially implement the gold standard, coinciding with its large discoveries of the metal. So, the criticism of ZIG is highly misplaced.
Zimbabwe is not wandering in the pool of confusion. ZIG follows The Bretton Woods Agreement, which established that the U.S. dollar was the dominant reserve currency, and that the dollar was convertible to gold at the fixed rate of $35 per ounce. It was only in 1971 that President Nixon of America terminated the convertibility of the U.S. dollar to gold.
The appeal of a gold standard is that it arrests control of the issuance of money out of the hands of imperfect human beings. With the physical quantity of gold acting as a limit to issuance, a society can potentially avoid the perils of inflation.
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 developed a nebulous definition over time but is generally used to describe any commodity-based monetary regime that does not rely on un-backed fiat money, or money that is only valuable because the government forces people to use it. Beyond that, however, there are major differences.
Some gold standards only rely on the actual circulation of physical gold coins and bars, or bullion, but others allow other commodities or paper currencies. Recent historical systems only granted the ability to convert the national currency into gold, thereby limiting the inflationary and deflationary ability of banks or governments. Many people have asked why Zimbabwe chose gold when it has so many minerals. This is because most commodity-money advocates choose gold as a medium of exchange due to its intrinsic properties. Gold has non-monetary uses, especially in jewelry, electronics, and dentistry, so it should always retain a minimum level of real demand.
It is perfectly and evenly divisible without losing value, unlike diamonds, and does not spoil over time. It is impossible to counterfeit perfectly and has a fixed stock—there is only so much gold on Earth, and inflation is limited to the speed of mining. Because of this, Zimbabwe needs to control the speed of mining and control the distribution of gold. Gold has to be made scarce so that its demand will increase. The time of the Makorokoza must be over. We must start respecting our gold so that ZIG will be accepted.