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…