A system whereby notes issued are backed by gold. In place in the UK from 1821-1914. The system has the advantage that it gives an automatic check on inflation, and the drawback that the total of world trade must always be limited by the total output of gold in the world. Three conditions must be satisfied for a gold standard to work:

(1) there must be free mintage of gold into the standard legal coins;

(2) gold must be freely importable into or exportable from the country;

(3) the legal paper money of the country must be convertible by the central bank into gold on request.