Heres Why The Us No Longer Follows A Gold Standard
Every few years, the idea of the gold standard becomes a hot topic. And why not? Gold is shiny and valuable, and people like it.
A gold standard means the value of a countrys currency is linked to a specified amount of gold. Under the gold standard, governments needed to be ready and willing to buy and sell gold to anyone at the set price.
When Did The World Come Off The Gold Standard
The world officially came off the gold standard in 1971, when President Nixon took the dollar, which was and remains the worlds reserve currency, o…
14 April 2021
The world officially came off the gold standard in 1971, when President Nixon took the dollar, which was and remains the worlds reserve currency, off its peg to the value of gold meaning it could float in value compared to other currencies. Prior to this the value of the dollar was pinned as $35 per troy ounce of gold. The movement of the dollar off the gold standard meant widespread currency fluctuations as the dollar depreciated and the price of gold rose. Spending to pay for the Vietnam war and the accompanying inflation saw gold rise to $880/oz by January 1980 when the Soviets marched into Afghanistan.
President Nixon took the US off the gold standard in 1971 in a move referred to as The Nixon Shock
Prior to what became known as The Nixon Shock, the UK came off the gold standard at the outbreak of the First World War.
Anything could be used to fix the value of currency and in the past other metals, such as silver, have been. Gold, however, has always been seen as the best. Universally it is seen as the best possible store of value.
Every country will have a national central bank which will hold reserves to back their currency. Typically, this includes other currencies such as dollars, euros and yen but central banks, almost without exception, still hold large amounts of gold.
The Gold Standard Explained
Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact.
The gold standard is a currency measurement system that uses gold as a way to set the value of money. It ensures that currency under a gold-standard system can be exchanged for gold. The gold standard signifies an agreement between society and its monetary institutions that the currency they spend and earn is a stand-in for gold.
To fully grasp the gold standard, it’s important to understand how gold has been used for centuries to set the standard for currency value, why it’s fallen out of favor, and its pros and cons.
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How Did The Gold Standard Contribute To The Great Depression
A number of complex factors helped to create the conditions necessary for the Great Depressionadherence to the gold standard was just one of those factors.
The causes of the Great Depression were numerous, and after the stock market crash of 1929, a number of complex factors helped to create the conditions necessary for the longest and deepest economic downturn in modern history. President Franklin D. Roosevelts decision to take the United States off the gold standard may have helped to ease the worst effects of the Depression.
Could The Gold Standard Come Back
Its very unlikely. In a University of Chicago poll this year, not one of 40 top economists surveyed supported a return to gold. The last gold standard commission, established by President Ronald Reagan, voted by a wide margin against bringing it back. The size and complexity of the U.S. economy would also make the conversion extremely difficult. Just to back the dollars now in circulation and on depositabout $2.7 trillionwith the approximately 261 million ounces of gold held by the U.S. government, gold prices would have to rise as high as $10,000 an ounce, up from about $1,780, causing huge inflation.
It could do massive damage to the economy, said John Makin, an economist at the American Enterprise Institute. So why the clamor for its return? Nostalgia, said economist Charles Wyplosz. People long for a simpler age, when the U.S. was the dominant economy and there were no financial markets to speak of. Its like getting back together with that old girlfriend, said s David Weidner. The current system may not be perfect, he says, but what people forget is that the gold standard never works. Every so often, we’ll reprint something from our sister publication, The Week. This is one of those times.
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Before The 18th Century
The use of gold as money began thousands of years ago in Asia Minor and has been widely accepted ever since, together with various other commodities used as money, with those that lose the least value over time becoming the accepted form. In the early and high Middle Ages, the gold solidus or bezant was used widely throughout Europe and the Mediterranean, but its use waned with the decline of the Byzantine Empire’s economic influence.
However, the early use of gold as money did not create a gold standard before the 18th century which was a sole currency system supporting the economy at large. For millennia it was silver, not gold, which was the real basis of the domestic economies: the foundation for most money-of-account systems, for payment of wages and salaries, and for most local retail trade. In England, most highly paid skilled artisans earned 6d a day ” rel=”nofollow”> pence, or 5.4g silver in the mid-15th century), and a whole sheep cost 12d. So even the smallest gold coin, the quarter-noble of 20d , was of little use for domestic trade.
Why Is Gold In Debate Again
Libertarian Rep. Ron Paul made a return to honest money a key plank of his presidential run, and the idea took hold among Tea Party conservatives outraged over the Federal Reserves loose monetary policies since the financial crisis. They argue that the U.S. debt now exceeds $16 trillion because the government has become too cavalier about borrowing and printing money. When the Fed prints money, gold-standard advocates say, it cheapens the value of a dollar, promotes inflation, and effectively steals money from the citizenry. In a nod to those ideas, the Republican Partys 2012 platform calls for the creation of a commission to investigate setting a fixed value for the dollar. The gold standard forces the U.S. to live within its means, said investment strategist Mark Luschini. Think of it as a person with a debit card rather than a credit card. The debit card holder can only spend what he or she has in the bank.
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When Did The Us Go Off The Silver Standard
The silver standard lasted for centuries, and the U.S., China, India, and Great Britain are countries that had adopted it. The Coinage Act of 1792, which created the U.S. Mint, first defined the dollar relative to silver, not gold.
So why dont we hear about the silver standard anymore, and what happened to it? Read on to learn more about the golden age of the silver standard and its eventual demise.
Bank Failures Led Ordinary Citizens To Hoard Gold
The U.S. economy boomed during the first part of the 1920sthe Roaring Twentieswith industries such as construction and automobiles driving the post-war recovery. In an effort to combat inflation, the Federal Reserve raised interest rates in 1928.
But European countries that had borrowed money from the United States during World War I had trouble paying off their debts. As a result, demand for U.S. exports slowed.
A slowing economy combined with the stock market crash of 1929 and a subsequent wave of bank failures in 1930 and 1931 led to crippling levels of deflation. Soon, the frightened public began hoarding gold.
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Performance Of The Gold Standard
As mentioned, the great virtue of the gold standard was that it assured long-term price stability. Compare the aforementioned average annual inflation rate of 0.1 percent between 1880 and 1914 with the average of 4.1 percent between 1946 and 2003.
But because economies under the gold standard were so vulnerable to real and monetary shocks, prices were highly unstable in the short run. A measure of short-term price instability is the coefficient of variationthe ratio of the standard deviation of annual percentage changes in the price level to the average annual percentage change. The higher the coefficient of variation, the greater the short-term instability. For the United States between 1879 and 1913, the coefficient was 17.0, which is quite high. Between 1946 and 1990 it was only 0.88. In the most volatile decade of the gold standard, 1894-1904, the mean inflation rate was 0.36 and the standard deviation was 2.1, which gives a coefficient of variation of 5.8 in the most volatile decade of the more recent period, 1946-1956, the mean inflation rate was 4.0, the standard deviation was 5.7, and the coefficient of variation was 1.42.
Finally, any consideration of the pros and cons of the gold standard must include a large negative: the resource cost of producing gold. Milton Friedman estimated the cost of maintaining a full gold coin standard for the United States in 1960 to be more than 2.5 percent of GNP. In 2005, this cost would have been about $300 billion.
How The Gold Standard Works
Money depends on trustthe faith that it will hold its value so that, when the time comes to spend it, it will be accepted without question in exchange for what the holder expects it to be worth. Inflation eats away at that value.
In modern times, governments are often a culprit behind inflation. Since they enjoy a monopoly on printing money, they can issue new currency at virtually no cost. But governments are run by vote-seeking politicians, who might print more money to juice short-term growth needed to win re-election, inadvertently causing inflation to flare up later. This quandary isnt theoretical, and has happened with surprising frequency throughout history. To cite a recent, prominent example, US president Richard Nixon bent to this temptation during his 1972 re-election campaigncontributing to the breakout of inflation that ravaged the American economy throughout the 1970s and early 1980s.
Theres a seemingly easy fix: Take the power of money creation out of the hands of politicians. According to the monetarist theory popularized by economist Milton Friedman in the 1970s, preventing inflation requires fixing the supply of money. The gold standard, by limiting the dollars the government can print to the weight of gold it holds in reserves, is one way of doing so.
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The Gold Standard Defined
Any history of the gold standard must begin by making clear what such a standard is, and what it isnt.
In a genuine gold standard, the basic monetary unit is a specific weight of gold alloy of some specific purity, or its equivalent in fine gold, and prices are expressed in the unit or in some fractional units based upon it. Assuming that coinage is a government monopoly, the government offers to convert gold bullion into full bodied gold coins, representing either the standard unit itself or multiples or fractions thereof, in unlimited amounts. There must, in other words, be free coinage of gold bullion. Coinage may also be gratuitous, with actual coinage costs paid out of the public funds, but that isnt essential: the mint might instead deduct the costs of coin manufacture or brassage, and even some profit or seigniorage, from the amount of coin returned in exchange for bullion, without undermining the standard. Coins in that case will command a premium above their bullion value representing the total coinage fee, and the monetary unit can be understood to stand either for the weight of fine gold that must be surrendered in order to obtain the nominal equivalent in gold coin, or for its coined representative.
Years After Nixon Ended The Gold Standard Dollars Dominance Faces Threat
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President Richard Nixon announcing the severing of links between the dollar and gold as part of a broad economic plan on Aug. 15, 1971.
Fifty years ago this Sunday, President Richard Nixon announced a bold economic plan, including the severing of the U.S. dollars ties to gold. Since then, the worlds monetary system has consisted of freely floating currencies. The dollar nonetheless remains the primary legal tender used internationally for trade, finance, and as a store of value, which has conferred upon the U.S. enormous advantages. Whether that will continue for the next half-century is far from certain.
The Bretton Woods system, in effect back…
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The End Of The Gold Standard
The gold standard remained in place until 1971. In 1970, the growing cost of the Vietnam war and a trade deficit caused the United States to make the decision to print more money. Other countries began to question Americas ability to actually cover all the American currency in circulation with gold.
The first county to actually leave the Bretton Woold system was West Germany. Seeing this move, and fearing that American currency they had invested in would lose value, other countries began demanding that the Unites States turn over gold in exchange for our currency.
President Nixon made the decision to take the country off the gold standard to prevent an economic meltdown.
After The Gold Standard We Got Bigger Government And A Smaller Dollar
August marks the 50th anniversary of Richard Nixons infamous to close the gold window, reneging on the U.S. governments pledge to redeem dollars for gold. Although Nixons action spelled the end of the postwar Bretton Woods framework, the system in place circa 1970 was a pale shadow of the original gold standard.
To realize just how much governments have transformed their role in the peoples money, it is useful to explain how the system originally worked.
From the founding of the constitutional Republic through the eve of the Civil War in 1861, the federal government didnt issue any legal-tender paper currency at all. Rather, for the official money, the federal government produced gold and silver coins stamped with various dollar denominations.
This is a critical distinction between the old and new ways: under Bretton Woods, the government pegged the dollar to gold . U.S. authorities decided how many dollars they were going to print, and if they were too aggressive, then other central banks could turn in their dollars and eventually drain American vaults of the yellow metal. But before the Civil War, government officials werent in charge of picking the quantity of dollars at all. Rather, the public determined how many dollars were in circulation by presenting gold or silver to the government for minting as coins according to weights specified in law.
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Did The Gold Standard Cause The Great Depression
The United States and other countries on the gold standard couldnt increase their money supplies to stimulate the economy. Great Britain became the first to drop off the gold standard in 1931. But the United States didnt abandon gold for another two years, deepening the pain of the Great Depression.
A Call To Return To The Gold Standard
Times change and some people are calling for a return to the gold standard. One of the biggest challenges facing the US currently is the prospect of high inflation rates.
Being on a gold standard would limit the amount of money that is being printed, it would limit inflation, and it would stabilize the value of our currency. The hope is that returning to a gold standard would help the country regain some of its power and strength.
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Lawrence H Officer University Of Illinois At Chicago
The gold standard is the most famous monetary system that ever existed. The periods in which the gold standard flourished, the groupings of countries under the gold standard, and the dates during which individual countries adhered to this standard are delineated in the first section. Then characteristics of the gold standard , the various types of the standard , and implications for the money supply of a country on the standard are outlined. The longest section is devoted to the classical gold standard, the predominant monetary system that ended in 1914 , followed by a section on the interwar gold standard, which operated between the two World Wars .
What Is The Silver Standard
For the first 40 years of its existence, the U.S. operated on a bimetallic system of gold and silver, according to Investopedia.com.
However, silver coins were the favored currency, and domestic purchases made with gold were rare, Investopedia.com reports. The Founding Fathers wrote a bimetallic gold-silver standard into the United States Constitution.
At its genesis, the U.S. dollar was initially tied to the more abundant, reasonably priced white metal rather than the scarcer, costlier yellow metal. At the outset, Americans were so skeptical about the creation of paper money that silver certificatesredeemable for silver-dollar coinswere used for decades as legal tender.
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The Gold Standard Ended 50 Years Ago Federal Debt Has Only Exploded Since
This year marks the 50th anniversary of the end of the gold standard in the U.S. In August 1971, President Richard Nixon formally unpegged the U.S. dollar from gold, meaning the greenback was no longer convertible into bullion. Overnight, the dollar became a free-floating currency, measurable only by comparing it to other world currencies.
And yet there were still restrictions on private ownership of gold coins, bars and the like. It wouldnt be until President Gerald Ford signed a bill in December 1974 that Americans could freely buy and trade bullion, for the first time in over 40 years.
A lot happened as a result. Its price no longer fixed, gold exploded 385% from the end of 1974 to 1980, when the metal topped out at $850 an ounce as the U.S. coped with historic levels of inflation.
Over the past 50 years, gold has expanded more than 46 times, with a compound annual growth rate of about 8%.
U.S. Global Investors
The ability to trade gold freely has obviously been good for investors. Today, gold bullion is one of the most liquid assets in the world, its daily volume standing at more than $145 billion, according to the World Gold Council . Only the S& P 500 and U.S. Treasuries trade morebut not by much.
The Age of Runaway Debt
Today, with the dollar backed not by a hard asset but by the full faith and credit of the U.S. government, the federal debt is closing in on an astronomical $28 trillion, which is more than 130% of the size of the U.S. economy.