FDR takes United States off gold standard - Jun 05, 1933 - HISTORY.com This Day in History - June 5, 1968, Senator Robert F. Kennedy was assassinated in the Ambassador Hotel by 24-year old Palestinian Sirhan Sirhan. He was shot in the head and died early the next morning. Lead Story FDR takes United States off gold standard Share this: FDR takes United States off gold standard Author FDR takes United States off gold standard URL Publisher A+E Networks On June 5, 1933, the United States went off the gold standard, a monetary system in which currency is backed by gold, when Congress enacted a joint resolution nullifying the right of creditors to demand payment in gold. The United States had been on a gold standard since 1879, except for an embargo on gold exports during World War I, but bank failures during the Great Depression of the 1930s frightened the public into hoarding gold, making the policy untenable. Soon after taking office in March 1933, Roosevelt declared a nationwide bank moratorium in order to prevent a run on the banks by consumers lacking confidence in the economy.

He also forbade banks to pay out gold or to export it. According to Keynesian economic theory, one of the best ways to fight off an economic downturn is to inflate the money supply. And increasing the amount of gold held by the Federal Reserve would in turn increase its power to inflate the money supply. Facing similar pressures, Britain had dropped the gold standard in 1931, and Roosevelt had taken note. On April 5, 1933, Roosevelt ordered all gold coins and gold certificates in denominations of more than $100 turned in for other money. It required all persons to deliver all gold coin, gold bullion and gold certificates owned by them to the Federal Reserve by May 1 for the set price of $20.67 per ounce. By May 10, the government had taken in $300 million of gold coin and $470 million of gold certificates. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed.

In 1934, the government price of gold was increased to $35 per ounce, effectively increasing the gold on the Federal Reserve’s balance sheets by 69 percent. This increase in assets allowed the Federal Reserve to further inflate the money supply. The government held the $35 per ounce price until August 15, 1971, when President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus completely abandoning the gold standard. In 1974, President Gerald Ford signed legislation that permitted Americans again to own gold bullion. Related Videos Abandonment of Gold Standard during Inter-War Period - International Political Economy Abandonment of Gold Standard during Inter-War Period From International Political Economy Jump to: navigation , search As explained in The Gold Standard during the Inter-War Period , most countries returned to the gold standard after World War I, implying that the countries maintained a stable exchange rate with gold and guaranteed currency convertibility with gold. Countries had three different ways to go back to gold back: reform, stabilization, or restoration. Each of these trajectories came with different costs and benefits with enormous implications for the global monetary system.

The experiences of three major European countries during the inter-war period, demonstrate, for example, how the lack of international cooperation, including on global imbalances, eventually led to the abandonment of the Gold Standard by the major European powers and the United States. Contents 5 References Reform, Stabilization or Restoration In order to understand the abandonment of the Gold Standard during the Inter-War period, one must examine the different paths major players took on their way back to the gold standard. World War I forced countries to go off the gold standard, which meant that European currencies were overvalued compared to the available gold reserves. Germany experienced severe hyperinflation which forced the country to replace their currency, first with the Retenmark which was backed by land and securities, and then in 1924 when the Reichmark was introduced which was backed by gold at the prewar parity level. France and several other countries, such as Belgium, stabilized their currency at the postwar level, which meant they did not have to endure deflation, but their commitment to the gold standard was questioned. Finally, Britain chose to restore and so maintained its prewar exchange rate. It maintained credibility but forced a contraction of the currency supply, and deflation, which led to unemployment.

The final important note of the return to the Gold Standard after World War I was the immense amount of economic growth with a relatively small increase in the global gold supply which took place in the 1920's revealing the deflationary bais of the gold standard. Britain Abandons Gold After restoration in Britain, as a result of staggered deflation, domestic prices were relatively higher than the price of foreign products, which caused declining exports and increasing imports. The stabilization method pursued by France created the opposite effects, which forced increasing exports and declining imports. Summarizing the above, we see that the Pound was overvalued and the Franc was undervalued which led to gold moving in large quantities away from Britain and towards France. The mounting gold imbalances and the failure of the British and other governments to cooperate and fix the system ultimately led to another collapse. Great Britain abandoned the gold standard in 1931, 23 more countries followed them in 1932, the USA in 1933, and France in 1936. Explaining Abandonment Many theories have attempted to explain the sudden abandonment of the gold standard.

Professor Morrison at Middlebury College has studied this case extensively, and offers the following conclusion conclusion: the British abandonment of the gold standard in 1931 was both surprising and significant: "Great Britain’s abandonment of the gold standard in 1931 was one of the most significant and surprising policy shifts in the history of the international financial system". [1] Charles Kindleberger Systemic level theorists have attempted to explain the fragility of the gold standard. Charles Kindleberger puts forth an explanation derived from the logic of hegemonic stability theory. In this account, the reason the return to gold failed was because there was no hegemon to provide the impetus and power to run the international monetary system. He points to American unwillingness to act as the hegemon as a key reason for the failure of the system. For example, the US Government had massive gold reserves but was unwillingness to provide the rest of the world with much needed leverage and liquidity. By raising interest rates to cool an overheating stock market, the US prioritized its domestic economy over the international economy and also attracted large volumes of foreign capital.

Furthermore, not only did the US halt its lending to Germany, but the stock market crash led to an "orthodox" monetary policy that severely constrained international gold flows, which Kindleberger argued was key to the failure of the new gold standard. Barry Eichengreen Barry Eichengreen's account focuses on the collapse of international norms after World War I which made international cooperation almost impossible. Before WWI, markets moved with banks, and helped them do their job. After the war, however, markets bet against banks as speculators hoarded or dumped certain currencies, which exacerbated the disequilibria. JM Keynes Finally, Keynes used the deflationary bias of the gold standard to explain that its time had come. He pointed out that in the 19th century there was plenty of gold to go around, but the 20th century gold shortages and misplaced reliance on this fickle commodity threw the system out of whack. Keynes supported a new global institution that would regulate a new international currency, which would later become the IMF.

These are all systemic level explanations which provide a context for the transformation and help explain the underlying causes for the abandonment of the gold standard, but they lack the dexterity to be used in determining proximate causes and the timing of the abandonments. Polanyi and Morrison The The 3 I's (ideas, interests, and institutions) provide a more nuances explanation of how domestic politics influences the international monetary system. Karl Polanyi offers an interest group explanation. His argument rests on the idea that the working class in Britain, the group that often bore the brunt of cost of adjustment from price level changes under the Gold Standard, became more politically empowered over the course of the interwar period. Polanyi explains that workers prefer monetary policy autonomy over a fixed exchange rate and with the increased political power they gained after the war, laborers were able to pressure policymakers to change policy and abandon gold. However, as James Morrison explains, this cannot explain Britain's constant desire to maintain the gold standard, and the credibility for exchange rate stability that went with it, prior to 1931. Morrison attributes a crisis as an opportunity where policymakers are open to new ideas.

John Maynard Keynes exploited that opportunity and the Bank of England's ignorance of the causes of the crisis to push forward his exchange rate policy, one not reliant on the gold standard. As Morrison explains, policymakers have two different types of policies to make. That is they will generally pursue policies that ensure the largest economy, but interests ability to influence policymakers will determine the policies that govern the distribution of the economy. As he explains, the exchange rate affects the entire country and thus, policymakers will pursue the exchange rate regime that they believe gives them biggest advantage on the world market. He explains that domestic institutions and interests determine the policies the govern "distribution", but they cannot explain radical shifts in policies like the abandonment of the gold standard in 1931 by Britain. That is left to Keynes's ability to exploit a crisis, and a crisis of knowledge by the leading politicians. See also Gold Standard References ↑ Morrison, James, Keynessandra No More: JM Keynes, the 1931 Financial Crisis, and the Death of the Gold Standard in Britain (2010). APSA 2010 Annual Meeting Paper.

Available at SSRN: Gold Standard: The Concise Encyclopedia of Economics | Library of Economics and Liberty | 2nd edition | Gold Standard The gold standard was a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price. England adopted a de facto gold standard in 1717 after the master of the mint, Sir Isaac Newton, overvalued the guinea in terms of silver, and formally adopted the gold standard in 1819. The United States, though formally on a bimetallic (gold and silver) standard, switched to gold de facto in 1834 and de jure in 1900 when Congress passed the Gold Standard Act. In 1834, the United States fixed the price of gold at $20.67 per ounce, where it remained until 1933. Other major countries joined the gold standard in the 1870s. The period from 1880 to 1914 is known as the classical gold standard.

During that time, the majority of countries adhered (in varying degrees) to gold. It was also a period of unprecedented economic growth with relatively free trade in goods, labor, and capital. The gold standard broke down during World War I, as major belligerents resorted to inflationary finance, and was briefly reinstated from 1925 to 1931 as the Gold Exchange Standard. Under this standard, countries could hold gold or dollars or pounds as reserves, except for the United States and the United Kingdom, which held reserves only in gold. This version broke down in 1931 following Britain’s departure from gold in the face of massive gold and capital outflows. In 1933, President Franklin D. Roosevelt nationalized gold owned by private citizens and abrogated contracts in which payment was specified in gold. Between 1946 and 1971, countries operated under the Bretton Woods system. Under this further modification of the gold standard, most countries settled their international balances in U.S. dollars, but the U.S. government promised to redeem other central banks’ holdings of dollars for gold at a fixed rate of thirty-five dollars per ounce. Persistent U.S.

balance-of-payments deficits steadily reduced U.S. gold reserves, however, reducing confidence in the ability of the United States to redeem its currency in gold. Finally, on August 15, 1971, President Richard M. Nixon announced that the United States would no longer redeem currency for gold. This was the final step in abandoning the gold standard. Widespread dissatisfaction with high inflation in the late 1970s and early 1980s brought renewed interest in the gold standard. Although that interest is not strong today, it seems to strengthen every time inflation moves much above 5 percent. This makes sense: whatever other problems there were with the gold standard, persistent inflation was not one of them. Between 1880 and 1914, the period when the United States was on the “classical gold standard,” inflation averaged only 0.1 percent per year. How the Gold Standard Worked The gold standard was a domestic standard regulating the quantity and growth rate of a country’s money supply .

Because new production of gold would add only a small fraction to the accumulated stock, and because the authorities guaranteed free convertibility of gold into nongold money, the gold standard ensured that the money supply, and hence the price level, would not vary much. But periodic surges in the world’s gold stock, such as the gold discoveries in Australia and California around 1850, caused price levels to be very unstable in the short run. The gold standard was also an international standard determining the value of a country’s currency in terms of other countries’ currencies. Because adherents to the standard maintained a fixed price for gold, rates of exchange between currencies tied to gold were necessarily fixed. For example, the United States fixed the price of gold at $20.67 per ounce, and Britain fixed the price at £3 17s. 10½ per ounce. Therefore, the exchange rate between dollars and pounds—the “par exchange rate”—necessarily equaled $4.867 per pound. Because exchange rates were fixed, the gold standard caused price levels around the world to move together. This comovement occurred mainly through an automatic balance-of-payments adjustment process called the price-specie-flow mechanism. Here is how the mechanism worked.

Suppose that a technological innovation brought about faster real economic growth in the United States. Because the supply of money (gold) essentially was fixed in the short run, U.S. prices fell. Prices of U.S. exports then fell relative to the prices of imports. This caused the British to demand more U.S. exports and Americans to demand fewer imports. A U.S. balance-of-payments surplus was created, causing gold (specie) to flow from the United Kingdom to the United States. The gold inflow increased the U.S. money supply, reversing the initial fall in prices. In the United Kingdom, the gold outflow reduced the money supply and, hence, lowered the price level. The net result was balanced prices among countries. The fixed exchange rate also caused both monetary and nonmonetary (real) shocks to be transmitted via flows of gold and capital between countries. Therefore, a shock in one country affected the domestic money supply, expenditure, price level, and real income in another country. The California gold discovery in 1848 is an example of a monetary shock. The newly produced gold increased the U.S. money supply, which then raised domestic expenditures, nominal income, and, ultimately, the price level.

The rise in the domestic price level made U.S. exports more expensive, causing a deficit in the U.S. balance of payments . For America’s trading partners, the same forces necessarily produced a balance-of-trade surplus. The U.S. trade deficit was financed by a gold (specie) outflow to its trading partners, reducing the monetary gold stock in the United States. In the trading partners, the money supply increased, raising domestic expenditures, nominal incomes, and, ultimately, the price level. Depending on the relative share of the U.S. monetary gold stock in the world total, world prices and income rose. Although the initial effect of the gold discovery was to increase real output (because wages and prices did not immediately increase), eventually the full effect was on the price level alone. For the gold standard to work fully, central banks, where they existed, were supposed to play by the “rules of the game.” In other words, they were supposed to raise their discount rates—the interest rate at which the central bank lends money to member banks—to speed a gold inflow, and to lower their discount rates to facilitate a gold outflow.

Thus, if a country was running a balance-of-payments deficit, the rules of the game required it to allow a gold outflow until the ratio of its price level to that of its principal trading partners was restored to the par exchange rate. The exemplar of central bank behavior was the Bank of England, which played by the rules over much of the period between 1870 and 1914. Whenever Great Britain faced a balance-of-payments deficit and the Bank of England saw its gold reserves declining, it raised its “bank rate” (discount rate). By causing other interest rates in the United Kingdom to rise as well, the rise in the bank rate was supposed to cause the holdings of inventories and other investment expenditures to decrease. These reductions would then cause a reduction in overall domestic spending and a fall in the price level. At the same time, the rise in the bank rate would stem any short-term capital outflow and attract short-term funds from abroad. Most other countries on the gold standard—notably France and Belgium—did not follow the rules of the game. They never allowed interest rates to rise enough to decrease the domestic price level.

Also, many countries frequently broke the rules by “sterilization”—shielding the domestic money supply from external disequilibrium by buying or selling domestic securities. If, for example, France’s central bank wished to prevent an inflow of gold from increasing the nation’s money supply, it would sell securities for gold, thus reducing the amount of gold circulating. Yet the central bankers’ breaches of the rules must be put into perspective. Although exchange rates in principal countries frequently deviated from par, governments rarely debased their currencies or otherwise manipulated the gold standard to support domestic economic activity. Suspension of convertibility in England (1797-1821, 1914-1925) and the United States (1862-1879) did occur in wartime emergencies. But, as promised, convertibility at the original parity was resumed after the emergency passed. These resumptions fortified the credibility of the gold standard rule. 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. (The reason for excluding the period from 1914 to 1946 is that it was neither a period of the classical gold standard nor a period during which governments understood how to manage monetary policy .) 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 variation—the 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. Moreover, because the gold standard gives government very little discretion to use monetary policy, economies on the gold standard are less able to avoid or offset either monetary or real shocks. Real output, therefore, is more variable under the gold standard. The coefficient of variation for real output was 3.5 between 1879 and 1913, and only 0.4 between 1946 and 2003. Not coincidentally, since the government could not have discretion over monetary policy, unemployment was higher during the gold standard years.

It averaged 6.8 percent in the United States between 1879 and 1913, and 5.9 percent between 1946 and 2003. 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. Conclusion Although the last vestiges of the gold standard disappeared in 1971, its appeal is still strong. Those who oppose giving discretionary powers to the central bank are attracted by the simplicity of its basic rule. Others view it as an effective anchor for the world price level. Still others look back longingly to the fixity of exchange rates. Despite its appeal, however, many of the conditions that made the gold standard so successful vanished in 1914.

In particular, the importance that governments attach to full employment means that they are unlikely to make maintaining the gold standard link and its corollary, long-run price stability, the primary goal of economic policy. About the Author Michael D. Bordo is a professor of economics at Rutgers University. From 1981 to 1982, he directed the research staff of the executive director of the U.S. Congressional Gold Commission. Further Reading Bordo, Michael D. “The Classical Gold Standard—Some Lessons for Today.” Federal Reserve Bank of St. Louis Review 63, no. 5 (1981): 2-17. Bordo, Michael D. “Financial Crises, Banking Crises, Stock Market Crashes, and the Money Supply: Some International Evidence, 1870-1933.” In Forrest Capie and Geoffrey E. Wood, eds., Financial Crises and the World Banking System. London: Macmillan, 1986. Bordo, Michael D., and A. J. Schwartz, eds. A Retrospective on the Classical Gold Standard, 1821-1931.

Chicago: University of Chicago Press, 1984. Especially “The Gold Standard and the Bank of England in the Crisis of 1847,” by R. Dornbusch and J. Frenkel. Bordo, Michael D., and A. J. Schwartz, eds. “Transmission of Real and Monetary Disturbances Under Fixed and Floating Rates.” Cato Journal 8, no. 2 (1988): 451-472. Ford, A. The Gold Standard, 1880-1914: Britain and Argentina. Oxford: Clarendon Press, 1962. Officer, L. “The Efficiency of the Dollar-Sterling Gold Standard, 1890-1908.” Journal of Political Economy 94 (1986): 1038-1073. Gold and the Gold Standard (use back button) Gold and the Gold Standard By 1914, the currencies of most developed countries represented given amounts of gold – while gold remained a commodity traded on the world market. Gold, in other words, was commodity money.

Commodity money had a long history in the form of cigarettes, barley, silver, salt and sea shells. Developed nations had made trade among them easier by having agreed to use a standard value for their money, and that standard was the commodity gold. Some people liked the gold standard because it gave them confidence that their money was worth what what their government claimed it to be. In the U.S. in 1896, the Democratic Party wanted to make it easier for farmers and other debtors to pay off their debts. They believed that basing the U.S. dollar on both silver and gold would accomplish this by increasing the money supply. Thus the Democratic Party's candidate for President, William Jennings Bryan's speech that included, "You shall not crucify mankind upon a cross of gold." In 1900 in the U.S., President William McKinley, a Republican, signed into law the Gold Standard Act. This established gold as the only standard for redeeming paper money. Silver was a commodity to be used for other things. Then came World War I. Before the U.S. joined that war, Europe's belligerents printed a lot of money to pay for their war effort. Britain was among them.

It was old stuff. Not enough was being collected in taxes to pay for their war efforts. The British government had suspended convertibility of their currency during the Napoleonic wars, and the US government had done so during the US Civil War, with convertibility resumed after the war. During the war, the printing of paper money was inflating currencies, and gold was passing to the United States as the belligerents paid for goods that they needed. After the war, those nations that had gone into deep debt found returning to the gold standard an unattractive option. Leaving their currency off the gold standard and inflated helped them reduce their debt. Germany, having lost much of its gold, was forced to issue more and more paper money, leading to hyperinflation. In 1925, Britain, in conjunction with Australia and South Africa, returned to the gold standard. The British were proud of their currency, the pound, and pegged it to gold at a prewar level: around $4.87 per ounce – a move by conservatives, including Winston Churchill, to whom pride was important. The circulation of gold in the form of coins was not allowed. France returned to the gold standard in 1928.

The French Franc was pegged to the dollar at 20 percent of its prewar value. With their currency undervalued, the French picked up a lot of foreign trade and prospered. The British had overvalued their currency and were losing trade. And they were losing more gold. In 1931, at the outset of the Great Depression, Britain left the gold standard because it was losing much of its gold. Australia and New Zealand had also given up on the gold standard, and Canada followed suit. That year, Japan and the Scandinavian countries also left the gold standard. Franklin Roosevelt became president of the United States in 1933. Roosevelt closed banks for a few days in order to stop "heavy and unwarranted withdrawals of gold and currency" and to stop "increasingly extensive speculative activity." A month later in a national emergency move he made it illegal for U.S. citizens to own gold. And two weeks later, on April 19, the United States officially abandoned the gold standard except for a few gold coins. The move allowed the government more flexibility in adjusting its money supply.

An international agreement for a measurement of value regarding currencies was established in 1944, near the close of World War II, at Bretton Woods outside Washington DC. The agreement fixed exchange rates relative to the U.S. dollar, and the U.S. dollar was convertible into gold at $35 an ounce. This lasted until 1971. The U.S. had been spending more money than it had on its war in Vietnam, and the U.S. war running a balance of payments deficit and a trade deficit. The administration of President Nixon solved its problem, as other nations had during World War I, by inflating the dollar. President Nixon announced that the U.S. would no longer convert dollars to gold at a fixed value. It was called the "Nixon shock." The U.S. did not have enough gold to back the dollar. The value of the dollar would now be governed by the money supply and what it would buy. Into the 21st century the dollar remained as the reserve currency for much of the world. In other words, the dollar was being held by many governments and institutions as part of their foreign exchange reserves – which was dependent on confidence in the dollar's value.

The dollar was filling the role that had once been filled by gold. Some people in the United States continued to believe in commodity money – not commodities such as salt or corn. A precious metal continued to be more convenient, and tradition inspired gold as the commodity of choice. And rather than gold representing an absolute value, speculators were driving the price of gold higher on the commodities market by buying gold in anticipation of selling it later at a higher price – subject, of course, to falls in price with the bursting of anticipation bubbles. A few people continued to view gold as having an absolute value. That it did not was one of the basic points that Adam Smith made back in the 18th century. Gold standard (economics) - RationalWiki Gold standard (economics) Goldbugs actually believe that rock somehow beats paper. The dismal science For the scientific and statistical use, see Gold standard (science) . For the ethical idea, see Golden Rule . “”Gold! Gold! Gold! There's gold in them thar hills! —Every crazy old prospector ever The gold standard (in economics ) refers to a type of monetary system where the currency of a country is backed directly by the national gold reserves.

In theory, it is possible for anyone in such a system to go to a bank and exchange a sum of money for a specific amount of gold. There is value to precious metals because as a society we have agreed that they have value, whereas paper does not have value because the gov... wait, what was my point. The idea behind the gold standard is that it offers economic stability by limiting inflation and promoting public trust in the national currency. As such, the notion generally attracts nostalgists who want to return to the good old days . What's funny about this is that, for a bunch of market zealots, they certainly seem to be terrified of stocks or (god forbid) options, swaps, derivatives, etc. Remember, they want all that stuff to be completely and utterly deregulated . Yet they hang to the rear by investing in gold, a vanilla money market account, and some US treasuries (government DEBT!), and rushing away from stocks and other commodities. For a bunch of free market cheerleaders, [1] it seems like they're terrified of playing the free market game with them there Yankee bankers.

[2] [3] Greenspan's quote, circulated frequently (and erroneously ), is "Gold is the canary in the financial coal mine": Soaring gold prices is a forecast of economic insecurity. As long as traditional investments are hitting the skids, gold will continue to hold its value and probably rise. This is great news for Fast Eddie's Pawn Shop but ominous for everybody else. Contents [ edit ] History [ edit ] Ancient to early modern history In ancient, medieval, and early modern monetary systems, coins were manufactured from gold, silver and other metals because of its ability to be mass produced and standardized. Because gold and silver were only owned by the wealthy for many centuries, people developed a fetishized desire for the metals and believed them to have a power over others, giving them an intrinsic value in themselves (i.e. the coins were specie). Before the first millennium BCE, most economic transactions were based on credit arrangements in which resources were exchanged as gifts, with the expectation that the gift would be paid back with interest at a later date. Rare metals were kept by the temples in ingot form and used as a form of accounting, and were not used in transactions until the early iron ages.

During the Axial Age (800 - 200 BCE), large scale warfare broke out among different competing states and kingdoms, fought by free peasant soldiers who plundered cities and removed stashes of gold and silver from temple stores, thus allowing the metals to be distributed among them. The first gold coins were minted in Lydia (located in modern-day Turkey ) in the 500s BCE to pay the salaries of its soldiers. This form of coinage became the prototype for other ancient currencies used in places such as Persia , Babylonia , and the Greek empire. [4] States also mandated that taxes and fees must be paid in coin, making bullion widespread for the first time. Gold coinage in China was also produced during this same period, and legends say that coinage was created by the emperor to deal with a flood crisis that created a famine. [5] During the height of the Roman Empire the first widely accepted coin that had a nominal value higher than its metal value emerged [6] , thus laying the basis for a system that differentiates between face value and token coins. However, with the decline of the Roman Empire those coins were accepted less and less and after its fall only face value coins remained in Europe.

The gold coins minted by emperor Constantine (the solidus) were used widely throughout the Mediterranean and remained the currency of the Byzantine Empire until its fall. [7] During the Middle Ages, silver coinage became more popular as the Byzantine Empire declined and eventually collapsed. [8] By the 18th century, keeping coins themselves as a store of value became impractical. Increasing quantities of money in circulation, growing use of notes and bank credit, and declining resources of silver during this period were factors that led to the development of the gold standard. [ edit ] Formalization of the gold standard in modern history The first country to formally adopt the gold standard was Great Britain. The gold standard was formalized over the period of the late 17th century to the early 19th century. The British government debased its bimetallic currency toward the end of the 17th century in order to pay off debt run up during the Nine Years' War. Much of the silver coinage in circulation at this point had been clipped and counterfeiting began to increase.

These factors caused a monetary crisis that led to what was known as the "The Great Recoinage of 1696." [9] The Bank of England, chartered in 1694 to provide credit to the British government, issued bank notes backed by and convertible to gold. The overabundance of credit in the form of paper currency in the late 18th century led to the suspension of the conversion of bank notes into gold from 1797-1821. Britain lifted this suspension in 1821 and returned to a formal gold standard. Other nations followed suit soon after, leading to the creation of an international gold standard. [10] The gold standard was suspended again during World War I and then reinstated, though war debts and other economic difficulties put massive amounts of pressure on the international gold standard system during the interwar period. [11] [ edit ] The Great Depression to Bretton Woods The Great Depression marked the collapse of the formal gold standard internationally. As Britain was the first to adopt the gold standard, it was also the first to leave the gold standard, doing so in 1931.

The US left the gold standard in 1933, withdrew gold from circulation for everyday transactions, and devalued the dollar . [12] Many other nations followed and abandoned the gold standard. The U.S. didn't completely abandon the gold standard during the Great Depression, though. Although private ownership of bullion gold was illegal, the price of gold was still pegged at $35 per ounce by law. After World War II , a new international monetary system was developed known as Bretton Woods, envisioned by John Maynard Keynes and Harry Dexter White. Under the Bretton Woods agreement, the US was on a quasi-gold standard. Holding about 75% of the world's monetary gold supply allowed the US to back the dollar with gold on the foreign exchange market and honor international trade debts in gold. Other nations agreed to peg their currencies to the dollar. As the world market price of gold increased, U.S. gold stocks were undervalued at its "officially" peg price of $35 per ounce (later $42). This hampered the U.S. government's ability to collateralize debt and take full advantage of the real value of its gold stockpiles.

In what became known as the Nixon Shock, the system of fixed exchange rates lasted until 1971 when Richard Nixon closed the gold window and the Bretton Woods system came to an end. [10] [13] The US dollar was already falling against the world gold price and since world markets were abandoning fixed currency exchange rates, no one would invest in the US without a substantial increase in interest rates. Nixon felt that allowing the gold price to inflate in line with world prices was less politically risky than doubling interest rates. [14] [ edit ] Economics [ edit ] Desire to return to a gold standard “”An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

— Alan Greenspan [15] Some people (such as perennial Presidential contender Ron Paul and adherents to the Austrian school [16] ) continue to preach in good faith that without a gold standard, money is "objectively worthless"; these people are sometimes known as "gold bugs". [17] Survivalists and conspiracy theorists often like the gold standard, as well as other precious metals like silver and platinum, because it holds out the promise of a stable currency in a governmental vacuum. The idea has also regained currency (no pun intended) recently with the ascent of the Tea Party . [18] The general appeal of the gold standard to these groups is to wrest control of the money supply from the government. (Or the Jewish bankers , or the New World Order , or whoever your favored bogeyman is.) As Herbert Hoover said, "We have gold because we cannot trust governments." [10] Price stability is another advantage to the gold standard. Fiat currencies live with the ever-present threat that the government might print massive amounts of money, leading to hyperinflation, but such an act would be impossible with gold since the supply of gold is intrinsically limited.

With fiat currency, you trade the possibility of hyperinflation for an inevitable hyper-deflationary spiral when the amount of gold ore that can be found runs out with the population continuing to increase.[ citation needed ] [ edit ] Problems with returning to a gold standard [ edit ] Not enough gold The largest and most glaring problem in returning to the gold standard is that there is simply not enough gold in the world to cover the quantity of currency presently in existence. To put it another way, even if the US were somehow able to purchase the world's entire gold stocks (in itself an impossible proposition) there would still be nowhere near enough gold to cover the total value of dollars in existence. It is estimated that the total amount of gold that has been mined in the world is equal to about 142,000 metric tons. [19] Assuming a price of $50,000 per kilogram (corresponding to around $1550 per troy ounce), that equals about $7.1 trillion: not enough to cover all circulating money and deposits in the United States, let alone the entire world.

A return to the gold standard would require a massive devaluation of the US dollar, precisely the scenario that many gold bugs feel that the gold standard would prevent . Furthermore, this calculation only applies to the US. If all the world's other countries were simultaneously trying to do the same thing then this problem would be exacerbated. In addition, if the US were to follow the policy of buying the world's gold as outlined above then a large number of the actual dollars would have ended up overseas and the US would have the metal. Presumably, the US would then have to create more dollars for internal use, which would hardly be a counter-inflationary policy. In addition, gold has gained several industrial uses in the last century, particularly the tech industry and some medical uses, as well as traditional uses in jewelry. The ensuing hyper-deflation of a return to the gold standard would devastate the jewelry industry (no one but the filthy rich is going to pay tens of thousands of dollars for a 14k gold wedding band, never mind 24k) and the tech industry as the extensive use of gold interconnects in chip packaging would send component prices through the roof.

[ edit ] Gold has little intrinsic value Gold aside from a few uses, obtains its value through its consumers (otherwise known as "the market"), and that the use of gold as reserve currency is more a tradition than anything else. There are a few practical industrial uses for gold, such as gold-plating electrical contacts to resist corrosion, but the demand for gold in such uses is tiny when compared with the world gold supply. The primary reason gold acquired its reputation as a valuable commodity is likely because it is almost impervious to corrosion in air and water. With the advent of stainless steel, a cheaper and more durable alloy which resists corrosion, gold no longer is nearly as desirable as an anti-corrosive and, as such, its intrinsic value has been immensely reduced. However, earlier examples of "currencies" without intrinsic value abound (feathers, shells, big fucking rocks , even slices of human bone). This minimal intrinsic value of gold is at least partly recognised by non-goldbugs who are nevertheless fixated on money being backed by "something real" .

If hard to find and chemically inert transition metals would be a good basis for money, we could just as well set up platinum , iridium , indium , or palladium standard instead of gold. Strangely, silver is a better standard compared to gold; it is scarcer and has many more uses compared to gold; [20] [21] [22] [23] [24] silver is used in many electronic devices such as phones, calculators, circuitboards, cameras, and opticals just to name a few. [20] It becomes even more scarce considering that electronics are just thrown away to remain in landfills. [20] [ edit ] Nothing to prevent the government from leaving the gold standard A government may choose to leave the gold standard as soon as it implements one. This is evidenced by the history of the gold standard above, in which it was suspended many times for various reasons. Therefore, the gold standard does nothing to rein in the government.

[ edit ] Lack of nutritional value "It's okay, honey — I bought some Rand Paul memorial gold coins on Infowars !" The standard response in a barter economy to a handful of American Eagles or Krugerrands is likely to be "sorry, can't eat gold." [25] In other words, the fact that gold is a shiny metal with little value besides what is assigned to it by society (in other words, one of those dreaded "fiat currencies") is consistently ignored by these people. Basically, the gold standard has the same problems as fiat currency: that gold has little practical use outside of specialized fields, [26] and that nearly all of its value has been assigned to it by society for its beauty and rarity. Even assuming the survivalist dream/nightmare in which President Obama launches his joint operation with the United Nations to herd Americans into FEMA camps , gold should be far down on the list of things to stuff in the bag before fleeing to the wilds. Aside from its lack of nutritional value, gold is very dense. A single 1 oz. Kruger rand weighs just under 34 grams.

[27] While the post-apocalyptic value of these coins (or similar quantities of gold) is unclear, it's not difficult to imagine the strain of carrying any significant quantities of gold (along with food and other supplies) while trying to evade the blue helmeted invaders. It's about as sensible as a Titanic passenger dragging a piano to the lifeboats. Short of stumbling upon camps of dentists or electronics engineers willing to exchange food, fuel, medicine or weapons for gold, one would think it smarter to have already stocked up on food, fuel, medicine, weapons, ammo, or flint to at least start a fire with. As it is, the most ardent gold bugs would likely die of starvation atop their stashes of gold. However, as previous crises and hyperinflations have shown, people who have a steady supply of food (e.g. farmers, butchers) can make big business with gold - they take an ounce of gold for a kilo of food in the hopes that the crisis will invariably end and after it ends their gold will indeed be worth more than the food they got it for. But not in that precise moment when the people with the gold are hungry.

Of course when there is a crisis with no end in sight nobody who has a steady supply or a big stash of food would trade it for something as worthless as yellow metal. [ edit ] Other problems with gold coins Physical gold coins are also very susceptible to scams. Such scams would include clipping and shaving coins, melting coins and adding in cheaper metals, and cornering the market. Many individuals advocating for a return to the gold standard are actually running or are advertising overpriced gold selling operations (e.g. Goldline ). Could it be that the politics of fear are being used by hucksters to make a quick buck? [ edit ] Gold doesn't even necessarily prevent inflation Look at all that inflation the gold standard prevented! All of this being said, this does not mean that printing money (or Bushonomics/Obamanomics ) is always a good thing; quite the contrary. Printing money without a sound policy to manage the money supply can devastate an already-troubled economy if people hoard the new money rather than spend it, reducing the real value of a stagnant market.

However, returning to the gold standard or a fixed exchange system does not prevent inflation (see the Mexican peso crisis of 1994 and the Icelandic financial crisis of 2009), undermining the very reason the gold bugs seek to reinstate the standard. All it means is that there will be a severe and debilitating crash in the currency when the government realizes it can no longer subsidize an artificially strong currency. A well-run mint would tie the production of "fresh" currency to run slightly ahead of growth in the economy, thus keeping the money supply in a close relation to the actual wealth of the nation. Even gold can suffer problems with inflation. [28] Gold rushes such as the California Gold Rush expanded the money supply and, when not matched with a simultaneous increase in economic output, caused inflation. [29] The "Price Revolution" of the 16th century demonstrates a case of dramatic long-run inflation. During this period, western European nations used a bimetallic standard (gold and silver).

The Price Revolution was the result of a huge influx of silver from central European mines starting during the late 15th century combined with a flood of new bullion from the Spanish treasure fleets and the demographic shift brought about by the Black Plague (i.e., depopulation). [30] [31] There are all sorts of other factors at play that affect inflation but they aren't tied to the currency itself. An oil shock is going to drive prices up if your economy relies on oil, which is inflationary whether your currency is backed by gold or nothing at all. This is an example of cost-push inflation. [32] [ edit ] Inflation vs. deflation: Two different kinds of thieves Another reason the gold bugs hate fiat currency is because of their belief that inflation is "theft." That is, your savings decrease in value because of the increase in money supply. This is true, but it also overlooks the fact that the gold standard tends to be deflationary and deflation could be called "theft" as well. The upper classes, while hit less hard by inflation due to their massive stocks of wealth, tend to also be creditors, while the lower classes are the debtors.

Inflation is good for the debtors as it makes their debt worth less, while deflation is good for creditors, as it makes debt worth more. This was the magic of mortgage debt — up until 2008, debts shrank over time as interest failed to keep up with inflation — and was also the reason why the American populist movement in the 1890s had the free coinage of silver as one of its chief planks. Real estate, like gold, has a fixed, known quantity or supply while population (or what is the same, "demand") is ever increasing. Theoretically, the value of the asset would only increase. A caveat, though, is that inflation is taken into account in setting interest rates (as many adjustable mortgage [33] debtors found out), so a constant inflation at an expected rate is neutral; only higher than expected inflation benefits debtors. Deflationary cycles also tend to lead to lower wages and job loss. So, overall, inflation helps people in debt and hurts people with savings or who own debt. [34] The issue of how inflation affects price stability is also important.

Gold bugs like to throw around the statistic that the value of the dollar has been devalued over 98% over the last century. Of course, this is a number with no context and ignores the bleeding obvious: wages have gone up since then as well! [34] If you want to go back to having your dollar worth what it was circa 1900, have fun going back to a circa 1900 paycheck too. Gold can help preserve long-term price stability to some extent, but it may actually be inferior to fiat currency in providing for short-term stability. Extreme short-term variability in price levels is not uncommon. The wild swings in prices during the late 1800s under the gold standard are one example of this. [35] In terms of price stability, then, the gold standard would be most helpful to people who prefer to stuff their money under the mattress, or bury it in a time capsule in the backyard if they are as nostalgic for turn-of-the-century currency as gold bugs are. Historically, the upper classes and economic elite have favored hard-money conservatism while the lower classes have favored populist inflationary policy.

This has led some to argue that advocating the gold standard is "class warfare" in disguise. [36] This was most evident in the US with the Free Silver movement, where populists such as William Jennings Bryan advocated inflationary policies. That's why it's rather ironic to hear hard-money conservatives in the vein of Ron Paul arguing that all inflation screws over the little guy and repackaging gold buggery in populist rhetoric, although it can be argued that the non-neutrality of money leads to monetary inflation increasing the wealth of the rich. The non-neutrality of money in the short run can allow whoever owns the printing presses (i.e., government) to channel money to itself or favored institutions or agents. This would be a case of what's called "financial repression." [37] It should also be noted that inflation can't be employed as a panacea . It can be used to economically disastrous ends, such as the infamous case of the Weimar Republic's hyperinflation, in which it devalued its currency into oblivion in an attempt to pay off war reparations. [38] So, in short, any monetary system can be used to screw over the little guy, the gold standard included.

Nevertheless, unless you're living in a nation suffering Weimar-style hyperinflation that desperately needs to anchor its currency to something, the gold bugs are firmly in crank territory. [ edit ] Fun with different official and black market exchange rates If the official exchange rate is enforced (i.e. the government will make exchanges on demand) and bi-directional (the government will buy and sell local currency at rate near the official rate), it may be exploited together with a drastically different black market exchange rates: if the official exchange rate gets you a larger amount of foreign currency (or gold, if the exchange rate is to gold) than black market exchange rates from the same amount of local currency, buy local currency from black market rate and sell it at its official rate. if the official exchange rate gets you smaller amount of foreign currency (or gold) than black market exchange rates from the same amount of local currency [39] , buy local currency at official rate and sell it on the black market. Most hyperinflationary governments maintaining an official exchange rate will not, however, enforce bi-directional exchanges like this (for example, they only will sell local currency at the official rate and will not buy any), making the enforcement essentially nonexistent.

[ edit ] Advantages of fiat currency The advantage of a fiat currency is in theory to match the expansion of the money supply with the expansion of economic output rather than having the money supply expand arbitrarily whenever a Yukon Cornelius 49er strikes gold. This helps prevent unwanted inflation from rapid, unexpected changes in the money supply. The reverse also applies in that fiat currency's elasticity can solve problems with deflation as well. The gold standard can become deflationary during a time of economic expansion due to its inelasticity and ultimately put a damper on growth. As population, the workforce, and overall economic output grow, if the money supply under a gold standard remained static, the demand for new money would outstrip existing stocks. Hence the cost of money, and things like payrolls, would become increasingly difficult to maintain over time. An instance of this occurred during the "Long Depression" of the late 19th century. [40] This deflationary effect also played a role in the Great Depression. Nations that dropped the gold standard saw dramatic recoveries during the 1930s compared to those that didn't, which either continued to stagnate or declined slightly.

[41] Ironically for libertarian advocates of the gold standard, Milton Friedman famously argued that the gold standard was a major factor in causing the Great Depression, contributing to the contraction of the money supply in 1929-1933. [42] The broad thrust of Friedman's argument is now conventional wisdom among economists and historians across a variety of schools of thought, though disagreement may exist on just how big a role gold played in the Depression. [43] Another advantage of fiat currency in depression situations is that government spending is often used to help stimulate the economy during a recession . With a gold standard the government would not have the ability to spend more money than it is taking in, to put money in the economy to help it recover. This would likely lengthen recessions as the government would lose one of its most important tools to help a shrinking economy. [44] Likewise, if the international trading system demanded trade accounts be settled in gold, the United States with its huge trade deficit would be paying for imported crude oil in gold. As well as interest on Treasury debt held by foreigners. And foreign manufactured consumer goods.

This would lead to a massive contraction in the money supply, a deflationary spiral, unemployment, shortages of cash and cash equivalents, and would probably ultimately end in conversion back to a fiat currency anyway to relieve the misery, poverty, social unrest, and political instability that would result. Paper money (backed by a sensible government) has an advantage over gold in that, while being intrinsically worthless, it is at least cheap to make, as opposed to gold which is intrinsically worthless and requires a massive mining and smelting infrastructure to extract and form into ingots which then do nothing but sit in vaults for the rest of eternity. This is why most developed countries have similar "floating" currencies, and it is only in the developing world that "fixed currencies" still exist, though most of those are fixed to the dollar, not to gold.

(Even so, in many of those, such as Zimbabwe and North Korea as well as the former governments of the old Soviet bloc, there are official exchange rates and black market exchange rates.) [ edit ] Pseudolaw: Fake constitutionality Gold bugs will sometimes use a pseudo-legal argument that only the gold standard is Constitutional, citing this clause: “”The Congress shall have Power To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; No State shall make any Thing but gold and silver Coin a Tender in Payment of debts. This is a combination of two passages from the constitution. [45] The first clause: "To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;" is Article I, Section 8, Clause 5. The second clause is found in another section entirely, referring to restrictions on the states, not Congress.

It is Article I, Section 10, Clause 1, which reads: "No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility." [46] Apparently, some people think that this prohibits fiat money. However, the quote says the exact opposite: It explicitly grants the federal government the power to coin money. The restriction to gold and silver applies solely to state governments. These passages refer to the the concept of 'Legal Tender,' which varies around the world but does not generally refer to the types of coins and banknotes that can be used for monetary exchanges, but the amounts of each denomination of note or coin that can be combined together for payment of court ordered debts [47] . This means that stories of people beating the system by paying debts using wheelbarrows of small change may be exaggerated and has little or no bearing on which currencies are constitutional regarding private sales.

[ edit ] The rhetoric and moralism of gold The issue of the gold standard, like all monetary issues, has as much to do with morality and philosophy as it does economics . As above, libertarian proponents of the gold standard often frame the issue in terms of government "corrupting" our money. [48] During the 19th century (and still today), a rhetoric of a superior morality surrounded gold. Gold was thought to be a sign of thriftiness and integrity.

It was even sometimes referred to as " God 's money." There was also a racial tinge to the rhetoric surrounding gold: In some segregated industries, white workers were paid from the "gold roll" while black workers were paid from the "silver roll." [49] Karl Marx noted this rhetoric as an example of his concept of "commodity fetishism," writing that both gold and paper money become "the direct incarnation of all human labor." [50] (Indeed, Marx might have said that capitalism merely replaced gold fetishism with paper fetishism if he had lived to see the 20th century.) Barry Eichengreen and Peter Temin argue that this "gold mentalite" was a factor that worsened the Great Depression due to policy-makers clinging to the gold standard despite its failure. [51] Opponents of the gold standard and proponents of paper or fiat currency similarly used rhetoric with moralistic and religious overtones.

As William Jennings Bryan said in his speech to the Democratic National Convention in 1896: "Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold." [52] John Maynard Keynes wrote in his book Monetary Reform: "In truth, the gold standard is already a barbarous relic." [53] The Greenback Party (active from 1875-1884), a third party that advocated the replacement of the gold standard with the paper "greenback" currency used to finance the American Civil War , often had themes of salvation running through its propaganda . [54] [55] When the St. Gaudens design for the $20 gold double eagle coin started being minted in 1907, president Theodore Roosevelt insisted that it not carry the motto In God We Trust , because he felt it was irreverent to put God on our money. (Congress overturned this within the year.)

Question: In which year between the World Wars did Britain go off the Gold Standard?
Answer: 1931