Ever since the American Gold Standard was abandoned in 1971, some politicians and economists have been calling for its return - citing the security of commodity-backed currency. Even in most presidential campaigns, at least one candidate proposes the reintroduction of the gold standard.
This begs the question: What is the gold standard? And if it is so good, why did we abandon it?
The gold standard is an economic system in which the value of a currency is determined by (and exchangeable for) gold.
One of the benefits of the gold standard is that when the currency is pegged to a finite resource like gold, outrageous government spending tends to be curbed. On the other hand, when currency is not linked to physical precious metals, national debt tends to soar.
In fact, all debt in the United States, both private and public, began to soar at the end of the gold standard, finally reaching the massive level of debt that the United States is currently facing today. However, with today’s economies reaching new heights, experts believe there is no practical way to bring back the gold standard.
Regardless of your opinion on bringing the gold standard back today, the role it played in American history is a significant one. Below, we will take a look at what a gold standard is as well as some important events from its history in the United States.
Introduction of the Gold Standard
By the mid-1800s, countries wanted to standardize transactions. As a result, they invented the gold standard. No longer would people have to carry and store heavy gold bullion or gold coins. Faith was placed in the government that their paper money would be worth something should they want to convert it back to a physical asset. Paper currency had a guaranteed value that was tied to something tangible.
The Federal Reserve was established in 1913 to stabilize gold and currency values. Before it had the chance to really get going, World War I began. Along with it, the suspension of the gold standard so that countries could print enough money to pay for their war efforts.
Printing more and more money, of course, produced hyperinflation, and countries started to see the value of returning to a gold standard after the war.
The gold standard was, at times, necessary for the stabilization of the economy. Tying currency to something tangible was a great way to ensure that the economy would remain stable.
Indeed, it did remain stable for quite some time, but times changed, and with that change came the necessity for a change in currency.
Timeline of the Gold Standard in the United States
For the first 40 years that it existed as a country, the United States had a gold and silver currency system. At this time, silver coins were most commonly used, and transactions using gold grew increasingly rare.
Silver increased in value compared to gold, and this increase effectively caused gold’s value to decrease. At this time, silver began to be exported. By 1850, nearly all the gold coins in America had disappeared from general circulation.
The United States briefly abandoned the gold standard during the American Civil War. Currency could not be converted to any kind of precious metal. Congress therefore decided to freeze the money that was in circulation at $347 million, and this amount held for around a century.
The United States adopted a classic gold standard in which a standard mass of gold defined the actual value of a unit of currency. Paper money, in this scenario, was not separate from gold and could be converted.
This system lasted until World War I. While this period was not free of its share of financial crises, it is considered by some historians to be the most economically stable period in American history.
Concerned that the country might revert back to using gold and silver, Congress decided to pass the Gold Standard Act, which made gold the standard currency. For the first time, greenbacks could be redeemed for a commensurate amount of gold.
In response to banking panics that often occur when gold reserves fall, the Federal Reserve was established. The Federal Reserve System maintained the gold standard but also issued notes from the Federal Reserve. These issued notes were only 40 percent backed by gold.
The Federal Reserve System removed the country from the standard after the Wall Street crash of 1929. Convertibility from paper to gold was ended. President Roosevelt, in effect, decided to nationalize gold when he issued an executive order making it so that all gold coins and bullion had to be relinquished to the federal government. These coins and bullion were sold at $20.67 per ounce.
As a result of this order, hoarding gold in either coin or bullion form was potentially punishable by a fine of $10,000 and possible jail time.
Representatives from the United States and other countries met to normalize relations, both financial and commercial. The agreement established somewhat of a gold standard where each currency - apart from than the United States dollar - would have a fixed parity to the American dollar and could be exchanged at $35 per ounce.
American citizens still were not able to hold gold. As a result, the United States dollar became the world’s currency of reserve.
President Nixon effectively closed the door on gold after announcing that the United States would not convert currency into gold any longer. This move was meant to be temporary, but in 1976 the American monetary system became composed of nonconvertible cash. Gold rose by a massive amount, going from $35 an ounce to $850 an ounce.
President Gerald Ford, once again, opened up ownership of gold.
Is a Modern Gold Standard in the United States Possible?
The gold standard did not always exist in this country, nor does it exist now. However, its long-term effects can still be felt today in the purchasing and hoarding of gold bullion and coins. Debt and inflation has had its moments of prominence in this country, and we are currently seeing a massive debt crisis in the United States.
Because of how much the world economies have grown over the years, it would be impractical (perhaps impossible) to implement such a system today.
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