Gold has become a topic for living room conversation in the past few years. It is in the news and even forms an undercurrent in political discussions. Not only have many people began buying quantities of gold but some of the talking heads on TV and the Internet have begun calling for a return to the gold standard that the United States abandoned in 1971.
This is the kind of talk that people of the last two generations, at least, have not heard in their lifetimes. Plenty of people in today’s society are not even aware that there was a gold standard and an even larger number of people are unaware of its significance. It is necessary to understand these things in order to comprehend the present rate of inflation in the national currency.
What Was the Gold Standard?
There is a difference between an actual gold standard and the system under which the economies of the United States and many other countries were operating during much of the 20th century. Obviously, most people during this time period were not walking around with gold coins in their pocket.
They relied on paper currency and sums written in account ledgers just as we rely on debit and credit cards. However, there was less of an imaginary status to their money because its value was linked to the value of gold.
No one actually designed the gold standard originally. It has simply been a custom of most nations and cultures throughout history to accept that gold was a valuable commodity. Eventually, in many areas, it became currency. At different times and in different places, silver was preferred as a currency.
The gold standard essentially meant that the paper bills issued by a country’s government had a fixed value based on gold. In a true gold standard, any person at any time could go to specifically designated locations and exchange their paper notes for actual gold.
The United States, through most of the 19th century and into the 1920s, was essentially on a bimetallic standard. All gold and silver coins were legal tender. However, due to various issues that cropped up during the 19th century, the silver standard was dropped.
The most pertinent facts for the present discussion about the gold standard in the US arose in the Great Depression. The US government, concerned that people would exchange their cash for gold in a mass movement and leave the government without this reserve, ordered all Federal Reserve banks to turn over their physical gold supplies to the US Treasury. While people could not freely exchange their cash for gold, the value of the currency was still based on the value of this gold.
The Bretton Woods Agreements.
After World War II, the nations of the world set up a gold exchange standard at a conference in Bretton Woods. This fixed international exchange rates to the US dollar. Since the US claimed that it would set the value of gold at roughly $35 per ounce, this allowed people around the world to fix their currencies indirectly to the price of gold.
Why Did the US Go Off the Gold Standard?
However, this system did not last. France began reducing its dollar reserves in the years following the war. This caused a strain on the economic power of the US. In the 1960s, this was exacerbated by the expense of the war in Vietnam and huge budget deficits. As a result, President Nixon took the country officially off the gold standard in 1971. This event is known in economic circles as the Nixon Shock.
A Return to the Gold Standard?
Since that time, currencies have been derided by some economists as fiat money. They claim that the lack of a gold standard makes it easier to print money and cause runaway inflation. Essentially, the value of money deteriorates because it is founded on nothing more substantial than the paper on which it is printed.
Many theorists think that it may be necessary to return to a gold standard in the future to stabilize economies. Other suggest that this is outdated thinking and recommend instead that nations use a standard based on a basket of commodities which may include gold.