What Currencies are Backed by Gold? (2022)

Does Gold Back Any Modern-Day World Currency?

Short answer is: No. Switzerland was the last country to have a Gold based currency. Currently the closest thing you can find to a Gold backed currency is Norwegian Krone. Norwegian Krone is backed by another commodity country is rich in- Natural Gas and Oil.

Lisa Goldstein

If you spend even a brief time in the financial market, you’ll eventually hear one or two financial analysts argue that the 19th-century gold standard was the best currency standard we have ever had. They often say it was a nearly ideal monetary system and that nations should switch back to it, even though most countries dropped the standard in the 20th century. What was the gold standard, and why aren’t we using it any longer?

What is A Gold Standard Currency System?

Despite being used as money for thousands of years, gold did not become the accepted standard for the entire world, or for any one nation until the late 19th century. It was then that Germany decided to base their currency and the circulation of its money on its gold reserves. The German government believed it was a way to give Germans more confidence in their currency. At any given moment, a German national knew that he could exchange his money for the equivalent in gold.

Other countries quickly saw the value in the gold standard and adopted it as well. The world currency standard was stable until the 1930s.

The Gold Standard Had Kept Things Stable But…

The exchange rates between currencies had been fairly fixed as almost every currency was fixed to gold or fixed to a currency fixed in gold. But, this system was not infallible and had a deficit. Insufficient gold reserves would cause a country’s money stock to decline, leading to deflation, high unemployment, and, in extreme cases, recession or even a depression.

Modern financial Experts Still Advocate The Gold Standard

Financial experts in favor of the gold standard contend that gold maintains a stable value and lowers the probability of a country’s extended economic crisis. Additionally, it would limit the reach of the government, reduce its trade deficit, and prevent unwanted wars by limiting military spending.

Analysts against the gold standard believe gold is too volatile. Implementing it as a currency standard would destabilize an economy and restrict government economic and military intervention. It would also increase the need for gold mining which may ultimately cause more harm to the environment.

What is The Fiat Currency?

Almost all the money in the world now uses a Fiat currency, and the Fiat system was first adopted by the UK and most other powerful countries quickly followed suit. This form of tender is only accepted as money because the government accepts it as money and because the public has enough confidence in their government to expect it to serve as a reliable medium of exchange. The Fiat is the system used by all major global economies since 1971.

Why Was The Gold Standard Dropped?

In 1930, a decade after the conclusion of World War I, the U.K. gave up the gold standard and switched to the Fiat financial system. They made this decision because their economy was faltering. The war bonds had dried up, so they believed they had no other choice. The changeover was only to be a temporary fix, just until the U.K. could gain more wealth and develop its economy. They felt that continuing with the Gold Standard would sink the country in a Great Depression, like the one the U.S. was undergoing.  They needed to print more money so adopting the Fiat system seemed like a wise choice at the time. Because of its decision, the U.K. boosted the economy and averted a depression similar to the one the U.S. was going through.

Countries Couldn’t Wait to Get Out of the Gold Standard

Other countries seemed happy once the U.K. withdrew. It implied that they could do the same. After the war, these other economies were in even worse shape than the U.K. The nations that withdrew concurred that it would also only be a temporary solution. Once their economies stabilized, they would return to the gold standard. However, changing to the Fiat system changed the way economies worked forever.

The United States was hurting just as much. The nation was in a terrible crisis. They were experiencing worst depression in history. Consequently, they, too, abandoned the gold standard and adopted the Fiat system in 1933. Financial analysts believe this change would stimulate the economy and create more financial growth in the U.S.

In the 1930s, the U.S. did not have much of a problem, as they had a substantial amount of gold reserves still available. However, as the years have passed, the Fiat system has been difficult for them to sustain. Debt has increased worldwide, and countries have had to rely on their reserves to maintain a working economy. 

Switzerland Was The Only Country to Hold on to the Gold Standard for Centuries

Switzerland was able to hold onto its gold reserves during World War II and even profit from the conflict to stockpile more, ensuring it had a significant amount of gold to back its currency.

Despite Switzerland’s efforts, the U.S. held most of the world’s gold reserves. As a result, it was able to value its currency against the reserves, making it simple for other nations to do the same instead of valuing their currencies against gold. However, the dollar was no longer backed by gold either, and other countries tied their currencies to the price of the U.S. dollar. The action caused the U.S. dollar to rise in value, which became the standard by which other currencies based their currency value.

The process has presented difficult issues such as increased demand for U.S. dollars and the pegging of emerging currencies on the dollar, causing severe inflation. Other countries that have valued their currency on the U.S. dollar depend on this U.S. control. 

Today, Some Countries Use An Unofficial Commodity-Based Currency

Switzerland was the last country to drop the gold standard, so no country uses the gold standard now. However, this does not mean that gold, silver, and other commodities are irrelevant to their currency. 

Many countries use a specific commodity or a set of commodities to correlate to their currency. For example, Australia experiences change due to the fluctuation in iron prices because they are the largest worldwide iron exporter.

Other countries have a currency linked to oil, and fluctuating oil prices can affect them. Currencies often affected by fluctuating oil availability and pricing include Canada, Russia, Columbia, and Norway, all large exporters of the black liquid gold.

The Value of The Commodity Based Currency

There is no legal value to a currency correlated to a commodity. These currencies are still legally based on Fiat paper, even though they may have no real value. Still, a country’s largest commodity may influence the value of its currency. Certainly, there are other influencing factors, but in general, how well their largest commodity does on the market will often influence their currency. In this way, they can somewhat protect their currency.

What Currencies Work Similarly to A Gold-Backed Currency?

The closest example to the gold-backed currency is the Norwegian Krone. Norway bases its economy on the price and availability of oil and gas commodities. Norway is a large oil exporter and has an economy that relies on natural gas and oil. So it is currently the currency system that works closest to a gold-based economy. Many financial experts believe Norway’s currency could be the safest in the world as the government has one of the lowest debt-to-GDP ratios. In comparison, The U.S. could sell all of its gold reserves and would not be able to pay even 5% of its GDP.