The gold standard: what is it and should we return to it?
Most people haven’t, yet it remains an important part of gold history, and it may serve us well if we got back on it.
So what exactly was “the gold standard?”
The gold standard was essentially a commitment by several participating countries to fix the prices of their respective domestic currencies in terms of specific amount of gold.
In essence, national money, along with other money like bank deposits and notes, were freely converted into gold at a fixed price.
England was the first to adopt 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 was next to act, switching 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 countries soon followed and this gold standard practice led to excellent economic growth in not only the United States, but around the rest of the world participating in the gold standard as well.
How Did it Work?
Basically, the gold standard was a domestic standard regulating the quantity and growth rate of a country’s money supply.
Since the new production of gold would add only a small fraction to the accumulated stock, and because the authorities guaranteed free convertibility of gold into non-gold money, the gold standard ensured that the money supply, and also the price level, would not vary much.
Since all exchanged rates were fixed, the gold standard allowed all money from all parts of the world to move more cohesively, or “together.”
In other words, a shock in one country affected the domestic money supply, expenditure, price level, and real income in another country. This made everything a bit more even.
Why Did We Stop Using It?
World War I is to blame for this. During this time, the gold standard broke down, as the major players in the gold standard started resorting to inflationary finance.
While it was briefly reinstated as the “Gold Exchange Standard” from 1925 – 1931, the overall theme soon fell apart after 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.
This essentially ended the gold standard for good, although we have seen versions of it up until around 1971.
Should We Adopt the Gold Standard Practice Again?
The answer to this question varies depending on whom you talk to.
The gold standard actually still has a lot of appeal to many people around the world. It was a fantastic way to control prices and interest rates, and as stated above, it allowed money to move more freely and evenly around the world.
Of course every investor enjoys getting in on gold when the price is low and then watching their ROI grow.
However, since the economy is so bad in the United States and Europe, it may be a good idea to try and bring the gold standard back as a way to stabilize to economy around the world.
[Editor's note: the views reflected in this article are the author's and the author's alone. They do not necessarily reflect the views of the rest of the End the Lie team.]
The above article is for informational purposes only and is not a solicitation by End the Lie or Goldco Direct. It is the commentator’s opinion only and not intended for investment recommendations, and does not necessarily reflect the views of End the Lie or Goldco Direct. Any references to outside sources are believed to be accurate. Past performance is not a guarantee of future results. All commodities involve risk. Investors should consult their financial advisor before making any investment decisions.