Not only have many people began buying quantities of gold but some of the talking heads on TV and the Internet have begun calling for a return to the gold standard that the United States abandoned in 1971.
This is the kind of talk that people of the last two generations, at least, have not heard in their lifetimes. Plenty of people in today’s society are not even aware that there was a gold standard and an even larger number of people are unaware of its significance. It is necessary to understand these things in order to comprehend the present rate of inflation in the national currency.
In their initial issue, they were printed in $20, $100, $500, $1,000, $5,000 and $10,000 denominations, making them more likely to have been used as interbank funds transfer instruments. Later on, Gold Certificates were also printed in $10 and $50 denominations. It is really a shame these notes were not circulated more as some of them were very ornately designed and quite beautiful.
In 1933, Congress passed the Gold Reserve Act, which among other things, made the possession of gold certificates illegal. Since the Series 1934 Gold Certificates were never released into circulation, they are most interesting of all the notes issued. Presumably, those Series 1934 notes were used as interbank funds transfer instruments only. The most exciting of those was the Series 1934 $100,000 note, bearing the portrait of Woodrow Wilson.
Despite the fact that ownership of Gold Certificates was illegal for thirty years, many remained in the hands of collectors, meaning that for a time, they had the distinction of being contraband US currency. In 1964, possession of gold certificates was re-legalized, although redemption for gold was not reinstituted. These notes can never be redeemed for actual gold by the US Government but some have achieved high values strictly as collectibles.
What Was the Gold Standard?
There is a difference between an actual gold standard and the system under which the economies of the United States and many other countries were operating during much of the 20th century. Obviously, most people during this time period were not walking around with gold coins in their pocket.
They relied on paper currency and sums written in account ledgers just as we rely on debit and credit cards. However, there was less of an imaginary status to their money because its value was linked to the value of gold.
No one actually designed the gold standard originally. It has simply been a custom of most nations and cultures throughout history to accept that gold was a valuable commodity. Eventually, in many areas, it became currency. At different times and in different places, silver was preferred as a currency.
The gold standard essentially meant that the paper bills issued by a country’s government had a fixed value based on gold. In a true gold standard, any person at any time could go to specifically designated locations and exchange their paper notes for actual gold.
The United States, through most of the 19th century and into the 1920s, was essentially on a bimetallic standard. All gold and silver coins were legal tender. However, due to various issues that cropped up during the 19th century, the silver standard was dropped.
The most pertinent facts for the present discussion about the gold standard in the US arose in the Great Depression. The US government, concerned that people would exchange their cash for gold in a mass movement and leave the government without this reserve, ordered all Federal Reserve banks to turn over their physical gold supplies to the US Treasury. While people could not freely exchange their cash for gold, the value of the currency was still based on the value of this gold.
The Bretton Woods Agreements.
After World War II, the nations of the world set up a gold exchange standard at a conference in Bretton Woods. This fixed international exchange rates to the US dollar. Since the US claimed that it would set the value of gold at roughly $35 per ounce, this allowed people around the world to fix their currencies indirectly to the price of gold.
Why Did the US Go Off the Gold Standard?
However, this system did not last. France began reducing its dollar reserves in the years following the war. This caused a strain on the economic power of the US. In the 1960s, this was exacerbated by the expense of the war in Vietnam and huge budget deficits. As a result, President Nixon took the country officially off the gold standard in 1971. This event is known in economic circles as the Nixon Shock.
A Return to the Gold Standard?
Since that time, currencies have been derided by some economists as fiat money. They claim that the lack of a gold standard makes it easier to print money and cause runaway inflation. Essentially, the value of money deteriorates because it is founded on nothing more substantial than the paper on which it is printed.
Many theorists think that it may be necessary to return to a gold standard in the future to stabilize economies. Other suggest that this is outdated thinking and recommend instead that nations use a standard based on a basket of commodities which may include gold.
Gold is one of the oldest forms of money, and the gold standard is a system where the money in circulation has a value directly linked to the reserve of gold the country has. It is when the value of a country’s money is tied to the amount of gold the country possesses. Anyone could trade in a country’s paper money and receive an agreed upon value of gold from that country’s gold reserves.
The international gold standard was established by Britain in 1821, using the Gold Sovereign as their unit. By 1871 Germany established a strict gold standard currency called “Reichsmark” and by the 1870′s France and the United States were using the gold standard as well.
By 1900 most global economic powers had also established the gold standard. A lot of countries had been using a silver standard and they switched over from the silver to the gold standard. A silver currency crisis in England made the United States suspend all payments in silver.
Different Types of the Gold Standard.
Three distinct types of gold standard can be identified as: one, the gold specie standard; two, the gold bullion standard; and three, the gold exchange standard. The country’s money is linked to the circulating gold coin when using the specie standard. In this standard the basic unit of currency was equal in value to an amount of gold, it was also able to be exchanged for gold.
The first to adopt the gold specie standard was the United Kingdom, soon to follow were Canada, USA, and Germany. The countries introduced their unit of money as the American Gold Eagle for the United States and the New Mark for Germany. Canada followed Britain and the United States by using their units of money within their country.
Circulation of coins made of medals that are not gold, like silver, was used in the gold exchange standard. Many countries that were using the gold exchange standard began to use their silver coins at the same value that the United Kingdom and United States used their gold coins. By 1908, China and Hong Kong were the only countries left on the silver standard.
The End of the Gold Standard.
With the outbreak of World War I, the United Kingdom ended using the gold specie system and so did the British Empire, instead another system was adopted, called the bullion standard. The new standard is a system where authorities agree upon an amount to sell gold, however the gold coins are not actually in circulation.
The country kept treasury notes instead of actually circulating the gold coins. Officially the gold specie system had not been repealed until 1925 when the Bank of England had been requested by someone to trade in their paper money for gold.
Then the bullion standard was put into effect, however this standard only lasted until 1931, when the United Kingdom ended the gold bullion standard because of large amounts of gold going overseas. Australia, New Zealand and Canada also ended the gold standard because of money problems that were associated with the Great Depression.
By World War I most countries were on the gold standard, but most suspended it so they could print enough money to pay for their investment in the war. The gold standard came to an end for the United States in 1933 when President Roosevelt prohibited owning gold privately, except for jewelry.
Then the Brenton Woods System came into effect in 1946, and most countries adopted this system, which allowed governments to sell their gold to the United States at $35/ounce. The dollar started to deflate in terms of its value in gold, however, and in 1971 gold was repriced to $38/ounce then again in 1973 to $42/ounce, finally the U.S. government stopped using the Brenton woods system in 1973. Now that the market wasn’t completely government dictated, the price of gold quickly shot up to $120/ounce. Since that time, all major economies have not used the gold standard.
How the Gold Standard Helps the Economy
The gold standard had its benefits like — providing a self-regulating and stabilizing effect on the economy. This is because the government could only print as much money as it had in gold. This helps prevent inflation, which is too much money trying to buy too few goods.
As countries export more goods they receive more gold, which means they can print more money and increase their profits. This is what inspired Spain and European countries to find the New World in the 1500′s, so they could increase their gold reserves, and also why we had the Gold Rush in California and Alaska.
Another benefit of the gold standard is it tries to keep countries out of debt and trade deficits. If a country has any deficit, then they lose gold from their reserves so they can pay off their debt.
The Gold Standard in Today’s Society.
South Africa is the world’s largest gold mining country and the United States is the second largest. Most of the gold mining is on federally owned lands in the western states, with Nevada being the primary source. Canada and Australia are also major gold producers.
So would returning to a gold standard benefit the United States? It would definitely constrict the government’s ability to manipulate the economy. The government would not be able to reduce the money supply in times of inflation, this is done by raising interest rates, and it would not be able to increase the money supply in times of a recession, this is done by lowering the interest rates. The country’s money would have to remain constant, forcing fiscal discipline, a limit to government intervention, and a balanced budget.
But whether or not the United States should be based on the Gold Standard is no excuse for individuals to not invest in gold. Quite frankly, hyperinflation is coming and the dollar is doomed. The only safe choice with these facts in mind is to find an efficient way to buy gold.