The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. There are distinct kinds of gold standard. First, the gold specie standard is a system in which the monetary unit is associated with circulating gold coins, or with the unit of value defined in terms of one particular circulating gold coin in conjunction with subsidiary coinage made from a lesser valuable metal.
Similarly, the gold exchange standard typically involves the circulation only of coins made of silver or other metals, but where the authorities guarantee a fixed exchange rate with another country that is on the gold standard. This creates a de facto gold standard, in that the value of the silver coins has a fixed external value in terms of gold that is independent of the inherent silver value. Finally, the gold bullion standard is a system in which gold coins do not circulate, but in which the authorities have agreed to sell gold bullion on demand at a fixed price in exchange for the circulating currency.
No country currently uses the gold standard as the basis of its monetary system, although several hold substantial gold reserves.
The USA adopted a silver standard based on the Spanish milled dollar in 1785. This was codified in the 1792 Mint and Coinage Act, and by the Federal Government’s use of the “Bank of the United States” to hold its reserves, as well as establish a fixed ratio of gold to the U.S. dollar. This was, in effect, a derivative silver standard, since the bank was not required to keep silver to back all of its currency.
This began a long series of attempts by the USA to create a bi-metallic standard for the U.S. Dollar, which would continue until the 1920s. Gold and silver coins were legal tender, including the Spanish real, a silver coin struck in the Western Hemisphere. Because of the huge debt taken on by the U.S. Federal Government to finance the Revolutionary War, silver coins struck by the government left circulation, and in 1806 President Jefferson suspended the minting of silver coins.
The U.S. Treasury was put on a strict hard-money standard, doing business only in gold or silver coin as part of the Independent Treasury Act of 1848, which legally separated the accounts of the Federal Government from the banking system. However, the fixed rate of gold to silver overvalued silver in relation to the demand for gold to trade or borrow from England. The drain of gold in favor of silver led to a search for gold, including the California Gold Rush of 1849. Following Gresham’s law, silver poured into the USA, which traded with other silver nations, and gold moved out. In 1853, the USA reduced the silver weight of coins to keep them in circulation, and in 1857 removed legal tender status from foreign coinage.
In 1857 the final crisis of the free banking era of international finance began as American banks suspended payment in silver, rippling through the very young international financial system of central banks. In 1861 the U.S. government suspended payment in gold and silver, effectively ending the attempts to form a silver standard basis for the dollar.
Article Source: en.wikipedia.org