GOLD STANDARD



A gold standard is a monetary system under which pure gold is the standard of value for the currency of a country. In other words, a country's standard unit of exchange—a pound, a dollar, or a franc, for instance—is pegged to or defined in terms of a set price for gold. Under such a system, gold is central to the monetary system of the country as the medium of exchange and the store of value.

A gold standard has eight distinguishing characteristics:

There are advantages and disadvantages for a country on a gold standard. Much depends on the economic circumstances of the particular country and the global economic environment. Generally speaking, however, a gold standard tends to hold inflation in check while curtailing government spending. The gold standard also tends to stabilize currency exchange rates between those countries on it. The major disadvantage of a gold standard is that it hampers a country's ability to make adjustments in its domestic money supply and international exchange rates when needed.

The United States, at various times in its history, has been on an official gold standard, not on a gold standard, and even on a de facto gold standard. The U.S. experience with the gold standard is generally reflective of the economic history and theory of the gold standard monetary system.

BIMETALLIC STANDARD

In order to finance the American Revolutionary War, the Continental Congress and the various colonies or "states" issued paper money. More and more money was printed as the cost of the war increased—in fact so much money was printed that by the 1780s the notes or "continentals" were, to borrow a phrase, "hardly worth the paper they were printed on." The notes became devalued because there were not adequate reserves or faith in the currency to sustain their face value. Following the American Revolution, the U.S. Constitution gave Congress the sole authority to coin money and control its value. Congress soon established a bimetallic monetary standard for the country with both gold and silver coins being legal tender. By an act of Congress, 16 ounces of silver was equal in value to one ounce of gold. In addition to currency minted at the newly established Philadelphia Mint, many foreign gold and silver coins were in circulation. These coins became legal tender by an act of Congress in 1793 and remained as legal tender until 1857 when another act of Congress removed them from the U.S. monetary system. The term "legal tender" refers to currency that may be lawfully offered, and must be lawfully accepted, as payment for a debt. The value of these various coins was dependent upon the amount of gold or silver in their composition.

By the late 1700s and early 1800s paper currency was being printed by private banks and by the First Bank of the United States (1791-1811) and the Second Bank of the United States (1816-36). The populace had faith in these notes because they were backed by adequate gold and silver reserves. The private banks, however, seldom maintained adequate reserves to back their notes and as a result the value of these notes fluctuated wildly.

From 1792 until the Civil War, the United States was on a bimetallic standard. In order to finance the Civil War, the U.S. government began printing paper money for the first time since the American Revolution, but unlike the currency issued by the First and Second Bank these "greenbacks," as they were called, could not be exchanged for gold or silver. These greenback notes derived their value from the confidence of the populace in the U.S. government and whether the Union seemed to be winning or losing the war. In 1879, however, as a result of the Resumption Act of 1875, paper dollars could be redeemed for gold. Under this not quite official gold standard, the U.S. unit of value was the gold dollar coin that contained 23.22 grains of pure gold. Since a troy ounce weighs 480 grains, anyone with gold bullion could have every respective ounce of their gold coined into $20.67 (480 divided by 23.22) worth of coins less a modest seignorage fee.

"CROSS OF GOLD" SPEECH

Under this de facto gold-standard system, the U.S. government was not able to increase the supply of money as it was needed. As a result the U.S. economy underwent a series of economic slumps in the latter quarter of the 19th century. Various groups, especially farmers, began demanding that the government mint unlimited amounts of silver coins so as to increase the money supply. This became known as the free silver movement and one of its most ardent supporters was William Jennings Bryan (1860-1925), a Congressional representative from Nebraska from 1891 to 1895. At the 1896 Democratic National Convention in Chicago, Bryan decried the gold standard while urging adoption of the free coinage of silver in a speech that has become one of the most famous orations in the political history of America. Bryan said in part: "Having behind us the producing masses of this nation and the world, supported by commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold."

Despite Bryan's rousing speech, the Gold Standard Act of 1900 officially put the United States on a gold standard by declaring that the gold dollar was the country's standard unit of value and that all money issued by the United States would be maintained at parity with this standard. Thus every dollar of U.S. currency, be it in the form of paper money or nongold coins, and every dollar payable by bank check was equal in value to 23.22 grains of pure gold coined into money. The value of the dollar therefore fluctuated in relation to the world market value of gold. During this same period, other nations such as France, England, and Germany were also on the gold-standard system. An offshoot of the gold standard was the gold-exchange standard whereby a country would not exchange its own gold for its paper money but rather would issue a draft on a central bank of another country on the gold standard with which it "banked." Under this hazardous system, credit expansion of two or more countries was based on the reserves of only one.

GOLD OWNERSHIP IS LIMITED

The U.S. gold standard was interrupted during World War I but otherwise was in effect until 1933. As a result of stock market crash of 1929, the ensuing Great Depression, and numerous bank failures, Americans began hoarding gold. In 1931 Austria, Germany, and Great Britain went off the gold standard. On March 6, 1933, newly elected President Franklin D. Roosevelt issued an order forbidding banks to pay out or export gold. On April 5, again by a presidential order, Americans could not own more than $100 worth of gold or gold certificates. Amounts in excess had to be converted into other U.S. currencies. The Gold Reserve Act of 1934 authorized the president to revalue the dollar in relation to its existing statutory gold equivalent. This set the dollar's value at 59.04 percent of the par value as set by the Gold Standard Act of 1900, resulting in a gold "profit" of $2,806 million through devaluation of the dollar.

The gold standard was also under assault by economists who believed a major change in the monetary policies of industrialized nations was overdue. In the forefront of this new economic school was the noted English economist John Maynard Keynes (1883-1946). His 1936 book, General Theory of Employment, Interest, and Money revolutionized the monetary thinking of western economists. Keynes's ideas held strong appeal for a world in the grip of a major depression. His economic theories supplanted the school of classical economics, which was characterized by capital accumulation and the gold standard, and replaced it with the idea of a more managed economy using government deficit spending and other manipulations of a country's money supply for the common good—something not feasible with a gold standard.

IMF ESTABLISHED

Following World War II the International Monetary Fund (IMF) was established at Bretton Woods, New Hampshire. The goal of the IMF was, and still is, to stabilize national currencies. This was to be achieved, in part, by each member country being assigned a specific quota of gold and currency to be held by the IMF. This reserve would then be used to bolster the credit of countries in debt and ravaged by World War II. Much of this IMF monetary strength was, however, based on the strength of the U.S. dollar, which soon came under great pressure because of U.S. inflation and deficit spending.

For a variety of reasons, dollars began streaming out of the United States in the 1960s and early 1970s and into the treasuries and central banks of foreign nations. As U.S. deficits and U.S. inflation climbed, so did the demand to exchange these foreign-held dollars for gold. As a result of this unprecedented demand for U.S. gold, President John F. Kennedy in 1962 forbade Americans to hold gold coins. The demand for American gold continued, however, and by 1964 U.S. gold reserves had fallen to $15.5 billion (in 1947 American reserves were at $23 billion). By 1967 U.S. gold reserves had fallen to $12 billion and on August 15, 1971, because of continuing assaults on the dollar, President Richard Nixon announced that dollars held by foreign countries would no longer be redeemed for gold. The United States was effectively off what remained of its gold standard.

Since 1971 there have been half-hearted efforts to move the United States back to a gold standard. Gold-standard legislation, however, tends to languish in Congressional committee until forgotten only to reappear again in slightly different form and become forgotten again. Occasionally presidential candidates such as Jack Kemp and businessman Steve Forbes flirt with the idea of reviving the gold standard, but the idea generates little interest from voters and disdain from economists who feel that given the global economic environment, governments need to have more control over a country's money supply than a gold standard would allow. Some economic historians have even come to believe that a root cause of the Great Depression was the gold standard. They theorize that the 1929 stock market crash would have been an unremarkable economic contraction except that under the gold standard the only way to try and return the United States to economic stability was to let wages and prices fall. As a result, what should have been a recession became a depression. Other economists and analysts, however, believe that the answer to economic turmoil in much of the world, but especially Asia, is the return to a global gold standard. Under this envisioned standard, reliance would not be on physical reserves of gold but rather financial futures contracts issued by central banks. These futures contracts would guarantee the exchange of national currency for gold at a fixed rate.

[ Michael Knes ]

FURTHER READING:

Eichengreen, Barry J. Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press, 1996.

Gold Standard in History and Theory. New York: Routledge, 1997.

Hubbard, R. Glenn. Money, the Financial System, and the Economy. Reading, MA: Addison-Wesley, 1995.

Norton, Rob. "Lessons of the Great Depression." Fortune, 18 August 1997, 36.

Shelton, Judy. "How to End Currency Gyrations." Wall Street Journal, 21 January 1998, A22.

Skousen, Mark. Economics of a Pure Gold Standard. Irvington on-Hudson, NY: Foundation for Economic Education, 1996.



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