The gold standard: what is it and should we return to it?

By Jeremy Holcombe
Contributing writer for Goldco Direct and End the Lie

The gold standard: ever heard of 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.

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6 Responses to The gold standard: what is it and should we return to it?

  1. Matthew Slater December 22, 2011 at 4:06 AM

    It is very much in the interests of holders of gold and merchants of gold to argue for a gold standard because the price of gold would multiply several times if it was needed to back all the money. However there are other monetary solutions which would not advantage the rich so much, such as interest free fiat money issued by the government, a bitcoin standard, greater reliance on local currencies, or receipts for other commodities such as grain. These are largely outside the realm of political acceptability

    Reply
  2. Christian Dystopian December 22, 2011 at 8:41 AM

    In reality the “Gold Standard” is advantageous to the rich especially bankers.
    Gold is easily manipulated. What really works is the free coinage of Silver And Gold. This is in fact what the founders intended when they stipulated that Congress shall coin & mint money.
    For 3,00 years with few exceptions the ratio of Gold to Silver has been about 15 to one. Our original Dollars were not a set “Value” but a government certification of Amount & Purity of the Gold or Silver.
    In this fashion currency had value in & of itself. For example one ounce of Sliver may buy 10 lbs of flour when there is plenty of flour but only 8 lbs when there is less flour. Currency then does not fluctuate in value. It has value itself. Currency’s Purchasing power varied through supply & demand.

    Reply
  3. Rebecca Mathews January 4, 2012 at 12:19 PM

    This is a really interesting read, a lot to learn!

    in the end its hard to decide really if we should return to a gold standard or not. I know Ron Paul talks about it a lot.

    Reply
  4. Johny John January 5, 2012 at 1:29 PM

    Never knew the true story of gold,now I know it. It’s mostly BS what you hear on TV.

    Reply
  5. Olivia Hmelnitsky February 25, 2012 at 2:54 AM

    Gold for safekeeping is smart – especially with where the economy is going. Not where you are going to make money, mind you, but just one method to protect it.

    Reply
  6. Energy Performance Certificate Belgium August 15, 2012 at 4:17 AM

    Wonderful creations because it help an individual to come up a good variations how to safe energy to achieve certain gold on the things that they do.

    Reply

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