Abstract
The gold standard was the most popular currency system from 1800’s to 1970’s, until it was replaced by fiat money. The gold standard means, that a currency has fixed value directly linked to gold, and it is convertible into gold. Fiat money is not backed by anything. It gives central banks control to print as much money as they want. Still today, some economists argue that we should return to the gold standard. They claim that fiat money is the reason for booms and busts in the world economy. This literature review focuses on differences between the gold standard and fiat money. I will also review the economic history and how the world economy ended up to fiat money system. The usual argument from the gold standard advocates is that it leads to lower inflation. The empirical evidence proves this to be true, but on the other hand, short term price volatility was higher in the gold standard. Overall, the biggest problems of the gold standard came clear towards the end, as it was impossible to maintain. The biggest countries, such as the United States, Britain and France, wanted to move towards independent monetary policy.
