Gold standard

Under a pure gold standard, international currencies are tied to a specific amount of gold and the government stands ready to trade dollars for gold at a fixed rate.
 
Before World War I, the banking system in the United States (and in most of the world) was based on gold, and even though governments intervened occasionally, banking was more free than controlled. Because currencies were convertible to gold, nations could ship gold among themselves to adjust their "balance of payments." In theory, all nations operating in this fashion should have an optimal balance of payments of zero, i.e. they should not have either a trade deficit or trade surplus. 
The United States fixed the price of gold at $20.67 per ounce in 1834, and it remained there until 1933. The gold standard effectively came to an end in 1933 when President Franklin D. Roosevelt outlawed private gold ownership (except for the purposes of jewelry). The Bretton Woods System, enacted in 1946, created a system of fixed exchange rates that allowed governments to sell their gold to the United States treasury at the price of $35/ounce. Between 1946 and 1971, countries operated under the Bretton Woods system. 
However, the inflationary effects of the Vietnam War and the resurgence of other economies meant the United States could no longer comply with its obligation to exchange dollars for gold. Its own gold supply was rapidly declining. The Bretton Woods system ended in 1971, when President Richard Nixon removed the dollar from gold, ending the predominance of gold in the international monetary system. 
== Defenders Of The Gold Standard ==
Defenders of the gold standard have included former presidential candidates Jack Kemp and Stephen Forbes. Supporters argue that while the gold standard might open the door for an unscrupulous government to create inflation or unemployment, it also allows the government to fight inflation and unemployment.
In his book, The Theory of Money and Credit, Ludwig von Mises wrote that the "excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit's purchasing power independent of the policies of governments and political parties."
== The Great Depression ==
Some economic historians, including Barry J. Eichengreen and Golden Fetters have contended that attachment to the gold standard played a major part in keeping governments from fighting the Great Depression, and was a major factor turning the recession of 1929 to 1931 into the Great Depression of 1931 to 1941.
In a paper called "The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison" Federal Reserve chairman Ben Bernanke and Harold James in 1991 used annual data for twenty-four countries to confirm that countries which for historical or institutional reasons were more vulnerable to severe banking panics also suffered much worse depressions, as did countries which remained on the gold standard. 
== Gold Standard Adherence ==
-Source: Chicago Federal Reserve Paper, "Did Adhering to the Gold Standard Reduce the Cost of Capital?"
by Ron Alquist and Benjamin Chabot
== Resources ==
* NBER Working Paper No. 3488 "The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison," Ben Bernanke, Harold James, Issued in October 1990
*The Theory of Money and Credit, Ludwig von Mises, Published in 1912
*"The Gold Standard and the Great Depression," Barry Eichengreen, Peter Temin, Issued in June 1997
*Milton Friedman on the Gold Standard
*Did Adhering to the Gold Standard Reduce the Cost of Capital? by Ron Alquist and Benjamin Chabot - Published by Chicago Federal Reserve
== References ==
Category:Definitions