A gold standard describes a system where the value of a unit of currency is based on a fixed amount of gold. In other words, a country agrees to exchange paper money for gold at a set price.
There are three types of gold standard: gold specie, gold bullion and gold exchange. The gold specie standard is based on the value of a circulating gold coin. The currency unit takes its worth from that coin although other coins in the system are likely to be made from less valuable metals.
Gold bullion systems don’t have gold coins in circulation. However, the relevant authority agrees to exchange circulating currency for gold bullion at a fixed price – many people will remember banknotes printed with the phrase 'I promise to pay the bearer on demand'.
The gold exchange standard's main feature is that the government guarantees an exchange to the currency of another nation that uses the gold specie or gold bullion standard at a fixed rate.
Although many countries hold large amounts of gold in reserve, most stopped using gold standards as a basis for their monetary systems during the 20th century.