Gold standard reined the world for more than a 100 years in the time of the British Empire when they backed British Pound with gold. It worked because ultimately all the currencies got linked to the gold and countries kept gold reserves with their central banks. The only problem was that the supply of gold is very limited so backing the currencies with gold made sure that money supply was almost constant. This fixed exchange rate system ensured deflation in the global economy.
Gold standard got unhinged in the First World War. British tried to revive it but lost it to the United States who in the Bretton Woods Agreement promised to back US Dollar with gold and the rest of the signatories could back their currencies with US Dollar. This system worked for some decades but then got abandoned by the US in 1973 and from that time onward we have floating exchange rate system in the world. All currencies are free floating and the price of each currency is determined by the supply and demand.
Now Chinese are once again trying to revive the gold standard. Chinese Central Bank is thinking of backing Yuan with gold.
Why would China consider such a move? Hoffman explains that Chinese policy makers are already trying to establish the yuan as a reserve currency, and backing it with gold would help attract foreign capital.
