The big ideaA gold standard promises gold for money, and it only works while the promise is kept.
How it works
In the made-up village of Goldmere, Tomas kept ten gold bars in a vault and gave out paper notes, each one a promise worth one bar.
Notes were light to carry, and a seal on each showed it was real. Anyone could swap a note for a bar, so people trusted them.
Tomas's rule was one note for each bar. When the village printed two more notes, there were 12 notes for 10 bars, and when everyone rushed to swap, the vault ran out.
Many real countries tied their money to gold in the 1800s. Today no country promises gold for its money.
Two more notes than bars: the promise could not be kept.The gold standard in real life. The spacing is even, not to scale.
Example 1: The rule
Ten bars are in the vault.
Tomas prints one note for each bar: 10 notes.
Every note can be swapped, so people trust them.
Example 2: Two notes too many
The mayor prints 2 more notes: 10 + 2 = 12 notes.
There are still only 10 bars.
So 12 − 10 = 2 notes have no gold behind them.
Example 3: The rush
A rumour spreads that the vault holds less gold than there are notes.
Everyone swaps their notes at once.
After 10 swaps the vault is bare.
Two people hold notes that cannot be swapped: the promise is broken.
Example 4: Light or heavy
A bag of gold coins is heavy, and Rina's back ached.
A paper note is light.
That is why notes were useful, as long as the promise was kept.
Words to know
vault
A safe place with a thick door, where the gold was kept.
note
Paper money: here, a promise worth one bar of gold.
seal
A mark pressed on a note to show it is real.
gold standard
A country's money tied to a fixed weight of gold.
rush
Everyone swapping notes for gold at once.
Watch out
A note is a promise, not gold. It only works while the promise can be kept.
Printing extra notes is risky. Too many can break the promise.
No country uses the gold standard today, though many keep gold as treasure.
Some say the gold standard kept prices steady. It also limited how much money existed.
Try it
Goldmere has 10 bars. How many notes can it keep honest?
There are 12 notes and 10 bars. How many notes have no bar behind them?
Why was a note easier to carry than a bag of gold coins?
Does any country today promise gold for every note it prints?
Answers: 1. 10 · 2. 2 · 3. Paper is light and gold is heavy · 4. No
Try at homeWith a grown-up, look at a coin or a note. Ask what makes it worth something, and who agrees that it is.
For grown-upsLook at a coin or a note together and ask what gives it worth, and who agrees that it does. Today money works because people trust it and rules say how much is made.
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