A History of the Gold Standard

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This history of the gold standard explains why there's a growing group of advocates calling for its return…

President Herbert Hoover made a statement in 1933 that rang true for centuries and still rings true today for many: "We have gold because we cannot trust governments."

Hoover was talking about how governments have never been able to resist the temptation to inflate the amount of paper money issued until that paper money becomes nearly worthless. Gold, meanwhile, has been a reliable preserver of wealth for literally centuries.

Some nations have tried to meld the two together – gold and paper money – through the use of what is called the gold standard.

A gold standard is a monetary system where paper money is directly convertible into a fixed amount of gold. In other words, the value of paper money is backed by gold.

England was the first country to adopt such a monetary system in 1822 and its use soon spread around the world, including in the United States.

United States' Bi-Metallic System

Congress established the U.S. Mint in 1792, defining the value of the U.S. dollar in terms of a specific weight of gold and silver: a bi-metallic standard.

But when the United States devalued the dollar versus gold – from $19.39 per ounce to $20.67 an ounce – the U.S. shifted in effect to a gold standard system.

Under this system, it was not a requirement for banks to hold 100% of their deposit and paper money liabilities in gold or silver bullion. But banks were expected to hold enough bullion in their reserves in order to redeem them on demand for gold or silver at the official prices.

This 'requirement' stopped banks from over-issuing paper money, keeping monetary inflation in check. This gold standard feature is a favorite of its advocates today.

The Civil War, and all the spending for the War, disrupted the United States bi-metallic system. But in 1879, the country did go back to a metallic standard.

This time, however, it was a gold-only standard. Silver was relegated to use in small denomination money only. That move was not without a lot of political controversy though.

In 1896, Democrat party candidate William Jennings Bryan ran a populist campaign against gold and for using a silver standard system. Since there was more silver available than gold, it was felt the silver standard system would be less deflationary and less harsh on debtors.

U.S. Gold Standard System History: Surviving the Fed

The gold standard prevailed, though, and even survived its next obstacle…

Join the conversation. Click here to jump to comments…

  1. H. Craig Bradley | July 5, 2013

    THE MAKING OF A BANANNA REPUBLIC

    Whatever the merits of a gold-backed dollar monetary system may be, I leave such debates to the usual players ( Gold Bugs and Economists). In practice, it would probably be part of a reset of the entire global financial system and likely result in a devaluation of the U.S. Dollar. Such a move would instantly reduce the current standard of living and personal assets (wealth) of all Americans. We would lose in any system reset that diminished the international role of the U.S. Dollar.

    I believe this process is already in play and will continue. Whether it is eventually accompanied by a formal change in the value of the dollar internationally in respect to gold is a ongoing question. Keep in mind the entire global financial system has historically been reset about every 40 years. The last such system reset occurred when president Richard Nixon closed the "gold window" in 1971. So, we are overdue for a monetary change. Better pay down your debts while you can. Debts likely won't be foregiven nor will they be reduced because the U.S. dollar is devalued internationally either.

  2. Andrew Gutterman | July 9, 2013

    You might ponder the Narrative of Central Banker Omnipotence:

    http://epsilontheory.com/how-gold-lost-its-luster-how-the-all-weather-fund-got-wet-and-other-just-so-stories/

    An absolutely fascinating read.

    Andy

  3. Walter Baltzley | July 9, 2013

    MIlton Friedman gave a lecture in which he discusses how the US Government manipulated the GOLD STANDARD to bring about the GREAT DEPRESSION. The value of gold is extremely volatile and easily manipulated by Central Banks…who own 90% of the supply.

    The BI-METEAL standard worked initially because SILVER was the driver…the value of the dollar was set as a specific amount of silver, while the value of gold was allowed to float with the markets. This worked because the US had huge untapped silver mines. Thus Banks could not manipulate the price. If they tried to restrict supply and drive up the cost, we would simply dig more out of the ground.

  4. dourdan | July 9, 2013

    I was told they came to your front door and asked you for your gold—- I don't know about the silver though—- I was using silver dimes in the sixties for the good humor man

  5. fallingman | July 9, 2013

    Just a quick fact check.

    As of July 2013, central banks owned some 31,868.8 tons, according to the World Gold Council.

    From Wikipedia: It has been estimated that all the gold mined by the end of 2011 totaled 171,300 tonnes.

    Add another 1,700 for the last year or so to round 'er off and you have around 173,000 tons above ground.

    That puts the central bank percentage at 18.42% give or take. That's confirmed by Wikipedias calcs. "At the end of 2004, central banks and investment funds held 19% of all above-ground gold as bank reserve assets."

    That's a far cry from 90%. Now, given that the western central banks are almost certainly lying about how much they actually have vs what they count on their books that's been leased and swapped, I'd guess they have maybe half that amount or around 9-10%.

    Just wanted to set the record straight. I have no comment on the gold standard.

    • Greg Jaxon | March 31, 2014

      Well argued!

      Milton Friedman was wrong to suggest price manipulation by some agent cornering the market. He was correct in saying that the government screwed up what gold standard was left after the "innovations" of the pre-war and WWI era. It was quite likely that banishing gold bills from international trade and from bank reserves deprived the world of the wage funds that kept the world's laborers employed. But that is not a manipulation that Friedmanites will even discuss.

  6. Ernie Baldwin | July 9, 2013

    One Question: Why is the repatriation of Germany's gold from the U.S. going to take 7 years?

    • Henning Roschberg | July 10, 2013

      Because it is unavailable. It has been leased out and sold. The US government needs to either get it back from it's debtors or buy gold from mining companies or out in the open market in order to deliver it back. This is the only explanation that makes sense.

    • Kirk Matranga | December 24, 2013

      It's going to take 7 years because that's how long it will take the Federal Reserve to replace the German gold that they have leased out! The Fed has nothing to back up our CURRENCY (we don't have money, we have currency, and they are not the same thing!), and they have treated gold as a FRACTIONAL RESERVE. They are liars and cheats and have been from the start! Read "The Creature From Jekyll Island" by G. Edward Griffin if you have the guts to read the whole sordid story.

  7. Greg Jaxon | July 9, 2013

    Daltorio's account of the flawed US bi-metallic standard also needs fact checking.
    The constitution instructs Congress only to standardize the weights and purity of gold and silver coin for use as money. It was never authorized to establish either relative or absolute values of said coins. In yet another of Alexander Hamilton's cunning unconstitutional plots, he invented the original bi-metallic "price fixing". Gresham's Law then took over and drove hoarders first one way then the other as the prices were re-regulated. An excellent analysis of bimetallism from first principles can be found around page 12 of Whither Gold? and later comments on the cut and thrust of monetary history of bi-metallism are in the short essay The Silver Saga.

    Daltorio is infected with the false bias that governments create money. That's not so. Money is what markets circulate and hoarders keep under their mattresses; these are facts of human nature and its natural law. Governments that act in harmony with that law prosper. Ones that try to game the natural system must ultimately fail as human enterprises – though they may succeed for a while as inhuman tyrannies. A Gold Standard (i.e. an open mint with free market banking and bill exchange) is something the common law will reinvent left to its own devising.
    Asking a government to adopt it is irrelevant and possibly counter-productive.

  8. Brad M | August 21, 2013

    The gold standard is considered by some to be the solution to currency value issues. Sadly, history has shown well that governments manipulate gold values, lie about reserve amounts, and even steal other nation's gold reserves. And where things stand currently, it probably would not be feasable to go back to a gold standard nor would it make the difference hoped for in currency values. Perhaps one solution would be a basket resource approach, and one that made it impossible for one nation or central bank to manipulate all components. Central banks and their practices have gone a long way toward destroying currency values as well. Abolish them.

    • Sayan K | November 1, 2013

      I heard from the lecture by Hans-Hermann Hoppe that the backet approach is not viable as the currency backed by a basket of variuos commodities will be as liquid as the least liquid commodity in the basket.

    • Greg Jaxon | March 31, 2014

      In a basket, a central planner effectively fixes the relative prices of the component goods. Price fixing ruins economies. If the basket-maker must make a market to redeem money for actual goods, he will suffer the revenge of the arbitrageurs, who will suck the undervalued good out of the market and leave it overstocked with the overvalued ones.

  9. Bob | October 15, 2013

    Good point

  10. Don McCallum | November 27, 2013

    It is well past time for a return to the gold standard as outlined in the constitution. However this would emasculate all living politicians (including the female ones, if one equates testicles with political power) and therefore will not happen as a result of anything they are willing to do. The answer then is that the politicians have to go. The bottom of the Marianas Trench comes to mind as a suitable destination. Once the politicians are safely ensconced in their new home, never to roam the face of the earth again, comes the time to destroy their works of larceny, all central banks and related institutions. The Bible says that money is for a protection against lean times. For that to happen, whatever standard that backs whatever medium of exchange thereafter adopted must be something that has intrinsic value. That is, its value comes more from what you can do with it than what element it is. Gold is fine and has many uses as do most of the metallic elements. Uranium can be used to generate electricity and so on. Paper FIAT money should be outlawed and all of it destroyed. Consider the German Mark near the end of WWII. A wheelbarrow full of DM was not enough to buy a loaf of bread and the wheelbarrow was valued much more highly than what it held. You could back your currency with wheelbarrows and be better off. Better yet forget the currency word. Once you start printing money there is a disconnect between it and wealth. Make your money out of incorruptible metal, make it portable, and standardize the units worldwide so that a coin from one place has the same amount of value as one from another place. That last would put an end to currency traders, but who cares? They are a form of banker and bankers are a politicians best friend. Send them to the trench as well. Enough!

  11. rahul | February 1, 2014

    its nce

  12. Dan Lillard | February 7, 2014

    Just an observation. How is Germany requesting their money be repartriated anything like what DeGaulle was doing (which, according to the rules of Bretton II was perfectly legitimate)? In 1933 a gold backed currency was in place when the Great Depression was it's worst. Only when the US went OFF the gold standard did the economy begin to recover (IMHO). I'm no economist, but I'm beginning to think the answer is not either gold standard or no gold standard but perhaps a new hybrid. But all of this is moot if the bankers continue to write the laws of currency regulation. It's not the standard that got us into this mess…..it was greed. And I don't see anyone addressing that.

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