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.