ABSTRACT
The connection between gold and international trade was significantly indicative of the fact that the value of money or currency was also significantly related to the reserve of valuable metals or convertible currencies. Undoubtedly, the overwhelming drawbacks of the Gold Standard and commodity money opened the way for the ascendancy of fiat money. The relative paucity of gold created stabilisation problems. During the nineteenth century, gold was discovered in California, Australia, and South Africa. The inadequacy of gold supply precariously supported the international standard of currency valuation. Arbitrage and transaction costs made it feasible for exchange rate fluctuations to occur within a reasonable band known as gold "export and import points". When a country imported gold, its central bank could sterilise the effect of the gold inflow on the monetary base by selling securities on the open market. Sterilisation occurs when nations engage in offsetting domestic monetary policies to neutralise the effects of capital flows.
