Whitonomics - Issue 2 July 2014 | Page 12

IN DEPTH P.10 Abandoning the Gold Standard A History Lesson Geoffrey Sato-Holt By using the gold standard the U.S. were forced to live within its means. They were unable to undertake loose monetary policy, as it could cause money in circulation to exceed the limit. Loose monetary policy primarily involves setting low interest rates, stimulating increased borrowing (as it is cheaper). Too much borrowing causes excessive printing of money. This cheapens the value of the dollar, reducing the effectiveness of the currency. Such scenarios had previ- G old is seen as the most valuable of commodities, despite little practical use relative to many more abundant metals. This has not always been the case. Gold reserves once determined the circulation of money in an economy, having large relevance to the economic ability of nations. The gold standard is a monetary system in which value of a currency is defined in terms of gold. The amount of money in circulation cannot be increased without also increasing gold reserves. Global gold supply grows slowly so money in circulation can not be significantly increased in the short-term, preventing government overspending and inflation. Between 1879 and 1933 Americans were able to trade in $20.67 for an ounce of gold. It was on 19th April 1933, in the midst of the Great Depression, that the U.S. abandoned the gold standard. As of 2013 no country uses a gold standard as the basis of its currency. After the gold standard was dropped by President Franklin D. Roosevelt, all private gold was nationalised. Between 1946 and 1971, the U.S. government would redeem other central banks’ holdings of dollars at a fixed rate of $35 per ounce of gold. On August 15, 1971 Richard Nixon announced that the U.S. would no longer redeem currency for gold due to the desire to protect U.S. gold reserves, completely severing the ously occurred, with many notable examples in the 18th century when link between the dollar and gold. money was not tied to gold or silver. Another advantage related to this is the internal price stability that is guaranteed with the use of gold, as prices of gold do not fluctuate much. Consumers knew they could redeem their currency for gold, causing much increased confidence. As consumers have more confidence they spend more, increasing the rate of flow of money through the economy and stimulating economic growth. Both greater financial stability and economic activity occurred.