Gold standard

For other uses, seeGold standard (disambiguation).

Agold standardis amonetary systemin which the standardeconomicunit of accountis based on a fixed quantity ofgold.The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the late 1920s to 1932as well as from 1944 until 1971 when the United States unilaterally terminatedconvertibilityof the US dollar to gold, effectively ending theBretton Woods system.Many states nonetheless hold substantialgold reserves.

Two golden 20 kr coins from theScandinavian Monetary Union,which was based on a gold standard. The coin to the left isSwedishand the one on the right isDanish.

Gold certificateswere used aspaper currencyin theUnited Statesfrom 1882 to 1933. These certificates were freely convertible intogold coins.

Historically, thesilver standardandbimetallismhave been more common than the gold standard.The shift to an international monetary system based on a gold standard reflected accident,network externalities,andpath dependence.Great Britain accidentally adopted ade factogold standard in 1717 whenIsaac Newton,then-master of theRoyal Mint,set the exchange rate of silver to gold too low, thus causing silver coins to go out of circulation.As Great Britain became the world's leading financial andcommercial powerin the 19th century, other states increasingly adopted Britain's monetary system.

The gold standard was largely abandoned during theGreat Depressionbefore being re-instated in a limited form as part of the post-World War IIBretton Woods system.The gold standard was abandoned due to its propensity for volatility, as well as the constraints it imposed on governments: by retaining afixed exchange rate,governments were hamstrung in engaging inexpansionary policiesto, for example, reduce unemployment during economicrecessions.

According to a 2012 survey of 39 economists, the vast majority (92 percent) agreed that a return to the gold standard would not improve price-stability and employment outcomes,and two-thirds of economic historians surveyed in the mid-1990s rejected the idea that the gold standard "was effective in stabilizing prices and moderating business-cycle fluctuations during the nineteenth century."The consensus view among economists is that the gold standard helped prolong and deepen theGreat Depression.Historically,banking criseswere more common during periods under the gold standard whilecurrency criseswere less common.According to economistMichael D. Bordo,the gold standard has three benefits that made its use popular during certain historical periods: "its record as a stable nominal anchor; its automaticity; and its role as a credible commitment mechanism."The gold standard is supported by many followers of theAustrian School,free-market libertarians,and somesupply-siders.

Implementation

The United Kingdom slipped into agold specie standardin 1717 by over-valuing gold at15+1⁄5times its weight in silver. It was unique among nations to use gold in conjunction with clipped, underweight silver shillings, addressed only before the end of the 18th century by the acceptance of gold proxies like token silver coins and banknotes.

From the more widespread acceptance of paper money in the 19th century emerged thegold bullion standard,a system where gold coins do not circulate, but authorities likecentral banksagree to exchange circulating currency for gold bullion at a fixed price. First emerging in the late 18th century to regulate exchange between London and Edinburgh, Keynes (1913) noted how such a standard became the predominant means of implementing the gold standard internationally in the 1870s.

Restricting the free circulation of gold under the Classical Gold Standard period from the 1870s to 1914 was also needed in countries which decided to implement the gold standard while guaranteeing the exchangeability of huge amounts of legacy silver coins into gold at the fixed rate (rather than valuing publicly held silver at its depreciated value). The termlimping standardis often used in countries maintaining significant amounts of silver coin at par with gold, thus an additional element of uncertainty with the currency's value versus gold. The most common silver coins kept at limping standard parity includedFrench 5-franc coins,German 3-mark thalers,Dutch guilders,Indian rupees,and U.S.Morgan dollars.

Lastly, countries may implement agold exchange standard,where the government guarantees a fixed exchange rate, not to a specified amount of gold, but rather to the currency of another country that is under a gold standard. This became the predominant international standard under theBretton Woods Agreementfrom 1945 to 1971 by the fixing of world currencies to theU.S. dollar,the only currency after World War II to be on the gold bullion standard.

History before 1873

All references to "dollars" in this section refer to theUnited States dollar,unless otherwise stated.

Silver and bimetallic standards until the 19th century

The use of gold as money began around 600BCEin Asia Minorand has been widely accepted ever since,together with various other commodities used asmoney,with those that lose the least value over time becoming the accepted form.In the early and highMiddle Ages,theByzantinegoldsolidusorbezantwas used widely throughout Europe and the Mediterranean, but its use waned with the decline of the Byzantine Empire's economic influence.

However, economic systems using gold as the sole currency and unit of account never emerged before the 18th century. For millennia it was silver, not gold, which was the real basis of the domestic economies: the foundation for most money-of-account systems, for payment of wages and salaries, and for most local retail trade.Gold functioning as currency and unit of account for daily transactions was not possible due to various hindrances which were only solved by tools that emerged in the 19th century, among them:

• Divisibility:Gold as currency was hindered by its small size and rarity, with the dime-sizedducatof 3.4 grams representing 7 days' salary for the highest-paid workers. In contrast, coins of silver andbillon (low-grade silver)easily corresponded to daily labor costs and food purchases, making silver more effective as currency and unit of account. In mid-15th century England, most highly paid skilled artisans earned 6d a day (six pence, or 5.4 g silver), and a whole sheep cost 12d. This made the ducat of 40d and the half-ducat of 20d of little use for domestic trade.
• Non-existence of token coinage for gold:Sargent and Velde (1997) explained how token coins of copper or billon exchangeable for silver or gold were almost non-existent before the 19th century. Small change was issued at almost full intrinsic value and without conversion provisions into specie. Tokens of little intrinsic value were widely mistrusted, were viewed as a precursor to currency devaluation, and were easily counterfeited in the pre-industrial era. This made the gold standard impossible anywhere with token silver coins; Britain itself only accepted the latter in the 19th century.
• Non-existence of banknotes:Banknotes were mistrusted as currency in the first half of the 18th century following France's failed banknote issuance in 1716 undereconomist John Law.Banknotes only became accepted across Europe with the further maturing of banking institutions, and also as a result of the Napoleonic Wars of the early 19th century. Counterfeiting concerns also applied to banknotes.

The earliest European currency standards were therefore based on thesilver standard,from the denarius of the Roman Empire to the penny (denier) introduced byCharlemagnethroughout Western Europe, to theSpanish dollarand the GermanReichsthalerandConventionsthalerwhich survived well into the 19th century. Gold functioned as a medium for international trade and high-value transactions, but it generally fluctuated in price versus everyday silver money.

Abimetallic standardemerged under a silver standard in the process of giving popular gold coins likeducatsa fixed value in terms of silver. In light of fluctuating gold–silver ratios in other countries, bimetallic standards were rather unstable andde factotransformed into aparallel bimetallic standard(where gold circulates at a floating exchange rate to silver) or reverted to a mono-metallic standard.France was the most important country which maintained a bimetallic standard during most of the 19th century.

Gold standard origin in Britain

The Englishpound sterlingintroducedc. 800 CEwas initially a silver standard unit worth 20 shillings or 240 silver pennies. The latter initially contained 1.35 g fine silver, reducing by 1601 to 0.464 g (hence giving way to the shilling [12 pence] of 5.57 g fine silver). Hence the pound sterling was originally 324 g fine silver reduced to 111.36 g by 1601.

The problem of clipped, underweight silver pennies and shillings was a persistent, unresolved issue from the late 17th century to the early 19th century. In 1717 the value of thegold guinea (of 7.6885 g fine gold)was fixed at 21 shillings, resulting in a gold–silver ratio of 15.2, higher than prevailing ratios in Continental Europe. Great Britain was thereforede jureunder a bimetallic standard with gold serving as the cheaper and more reliable currency compared to clipped silver(full-weight silver coins did not circulate and went to Europe where 21 shillings fetched over a guinea in gold). Several factors helped extend the British gold standard into the 19th century, namely:

• TheBrazilian Gold Rushof the 18th century supplying significant quantities of gold to Portugal and Britain, withPortuguese gold coinsalso legal tender in Britain.
• Ongoing trade deficits with China (which sold to Europe but had little use for European goods) drained silver from the economies of most of Europe. Combined with greater confidence in banknotes issued by theBank of England,it opened the way for gold as well as banknotes becoming acceptable currency in lieu of silver.
• The acceptability of token / subsidiary silver coins as substitutes for gold before the end of the 18th century. Initially issued by the Bank of England and other private companies, permanent issuance of subsidiary coinage from theRoyal Mintcommenced after theGreat Recoinage of 1816.

A proclamation fromQueen Annein 1704 introduced theBritish West Indiesto the gold standard; however, it did not result in the wide use of gold currency and the gold standard, given Britain'smercantilist policyof hoarding gold and silver from its colonies for use at home. Prices were quotedde jurein gold pounds sterling but were rarely paid in gold; the colonists'de factodaily medium of exchange and unit of account was predominantly theSpanish silver dollar.(Also explained in thehistory of the Trinidad and Tobago dollar.)

The British gold sovereign or £1 coin was the preeminent circulating gold coin during the classical gold standard period.

Following the Napoleonic Wars, Britain legally moved from the bimetallic to the gold standard in the 19th century in several steps, namely:

• The 21-shilling guinea was discontinued in favor of the20-shilling gold sovereign,or £1 coin, which contained 7.32238 g fine gold
• The permanent issuance of subsidiary, limited legal tender silver coinage, commencing with theGreat Recoinage of 1816
• The 1819 Act for the Resumption of Cash Payments, which set 1823 as the date for resumption of convertibility of Bank of England banknotes into gold sovereigns, and
• TheBank Charter Act 1844,which institutionalized the gold standard in Britain by establishing a ratio between gold reserves held by theBank of Englandversus the banknotes which it could issue, and by significantly curbing the privilege of other British banks to issue banknotes.

From the second half of the 19th century Britain then introduced its gold standard to Australia, New Zealand, and theBritish West Indiesin the form of circulating gold sovereigns as well as banknotes that were convertible at par into sovereigns or Bank of England banknotes.Canada introduced its own gold dollar in 1867 at par with theU.S. gold dollarand with a fixed exchange rate to the gold sovereign.

Effects of the 19th century gold rush

Huge quantities of $20double eagleswere minted as a result of theCalifornia gold rush.

Up until 1850 only Britain and a few of its colonies were on the gold standard, with the majority of other countries being on the silver standard. France and the United States were two of the more notable countries on thebimetallic standard.France's actions in maintaining theFrench francat either 4.5 g fine silver or 0.29032 g fine gold stabilized world gold–silver price ratios close to the French ratio of 15.5 in the first three quarters of the 19th century by offering to mint the cheaper metal in unlimited quantities – gold 20-franc coins whenever the ratio is below 15.5, and silver 5-franc coins whenever the ratio is above 15.5. TheUnited States dollarwas also bimetallicde jureuntil 1900, worth either 24.0566 g fine silver, or 1.60377 g fine gold (ratio 15.0); the latter revised to 1.50463 g fine gold (ratio 15.99) from 1837 to 1934. The silver dollar was generally the cheaper currency before 1837, while the gold dollar was cheaper between 1837 and 1873.

The nearly coincidentalCalifornia gold rushof 1849 and theAustralian gold rushesof 1851 significantly increased world gold supplies and the minting of gold francs and dollars as the gold–silver ratio went below 15.5, pushing France and the United States into the gold standard with Great Britain during the 1850s. The benefits of the gold standard were first felt by this larger bloc of countries, with Britain and France being the world's leading financial and industrial powers of the 19th century while the United States was an emerging power.

By the time the gold–silver ratio reverted to 15.5 in the 1860s, this bloc of gold-utilizing countries grew further and provided momentum to an international gold standard before the end of the 19th century:

• Portugal and several British colonies commenced with the gold standard in the 1850s and 1860s
• France was joined by Belgium, Switzerland and Italy in a largerLatin Monetary Unionbased on both the gold and silverFrench francs.
• Severalinternational monetary conferencesin the last third of the 19th century began to consider the merits of an international gold standard, albeit with concerns on its impact on the price of silver should several countries make the switch.

The international classical gold standard, 1873–1914

See also:Latin Monetary Union,German gold mark,Central Bank,andprice–specie flow mechanism

Rollout in Europe and the United States

The international classical gold standard commenced in 1873 after theGerman Empiredecided to transition from the silverNorth German thalerandSouth German guldento theGerman gold mark,reflecting the sentiment of thefirst international monetary conferencein 1867, and utilizing the 5 billion gold francs (worth 4.05 billion marks or 1,451metric tons) in indemnity demanded from France at the end of theFranco-Prussian War.This transition done by a large, centrally located European economy also triggered a switch to gold by several European countries in the 1870s and led as well to the suspension of the unlimited minting of silver 5-franc coins in the Latin Monetary Union in 1873.

The following countries switched from silver or bimetallic currencies to gold in the following years (Britain is included for completeness):

• 1816,British Empire:onepound:from 111.37 g silver to 7.32238 g gold; ratio 15.21
• 1873,German Empire:oneNorth German thaleror 13⁄4South German guldenof 16.67 g silver, converted to 3German gold marksof 3/2.79 = 1.0753 g gold; ratio 15.5
• 1873,Latin Monetary Unionfranc: from 4.5 g silver to 9/31 = 0.29032 g gold; ratio 15.5
• 1873,United States dollar,by theCoinage Act of 1873:from 24.0566 g silver to 1.50463 g gold; ratio 15.99
• 1875,Scandinavian Monetary Union:Rigsdaler specieof 25.28 g silver, converted to 4krone(orkrona) of 4/2.48 = 1.6129 g gold; ratio 15.67
• 1875, Netherlands: theDutch Guilderfrom 9.45 g silver to 0.6048 g gold; ratio 15.625.
• 1881,Ottoman Empire:theOttoman lira
• 1892,Austria-Hungary:theAustro-Hungarian florinof 11.11 g silver, converted to twoAustro-Hungarian kroneof 2/3.28 = 0.60976 g gold; ratio 18.22
• 1897,Russian Empire:therublefrom 18 g silver to 0.7742 g gold; ratio 23.25.

The gold standard became the basis for the international monetary system after 1873.According to economic historianBarry Eichengreen,"only then did countries settle on gold as the basis for their money supplies. Only then were pegged exchange rates based on the gold standard firmly established."Adopting and maintaining a singular monetary arrangement encouraged international trade and investment by stabilizing international price relationships and facilitating foreign borrowing.The gold standard was not firmly established in non-industrial countries.

Central banks and the gold exchange standard

The US dollar was said to be on a limping standard due to huge quantities of silverMorgan dollarscontinuing to circulate at par withgold dollarsdespite their silver value being less.

As feared by the various international monetary conferences, the switch to gold, combined with record U.S. silver output from theComstock Lode,plunged the price of silver after 1873 with the gold–silver ratio climbing to historic highs of 18 by 1880. Most of continental Europe made the conscious decision to move to the gold standard while leaving the mass of legacy (and erstwhile depreciated) silver coins remaining unlimited legal tender and convertible at face value for new gold currency. The termlimping standardwas used to describe currencies whose nations' commitment to the gold standard was put into doubt by the huge mass of silver coins still tendered for payment, the most numerous of which wereFrench 5-franc coins,German 3-mark Vereinsthalers,Dutch guildersand AmericanMorgan dollars.

Britain's original gold specie standard with gold in circulation was not feasible anymore with the rest of Continental Europe also switching to gold. The problem of scarce gold and legacy silver coins was only resolved by nationalcentral bankstaking over the replacement of silver with national bank notes and token coins, centralizing the nation's supply of scarce gold, providing for reserve assets to guarantee convertibility of legacy silver coins, and allowing the conversion of banknotes into gold bullion or other gold-standard currencies solely for external purchases. This system is known as either agold bullion standardwhenever gold bars are offered, or agold exchange standardwhenever other gold-convertible currencies are offered.

John Maynard Keynesreferred to both standards above as simply the gold exchange standard in his 1913 bookIndian Currency and Finance.He described this as the predominant form of the international gold standard before the First World War, that a gold standard was generally impossible to implement before the 19th century due to the absence of recently developed tools (like central banking institutions, banknotes, and token currencies), and that a gold exchange standard was even superior to Britain's gold specie standard with gold in circulation. As discussed by Keynes:

The Gold-Exchange Standard arises out of the discovery that, so long as gold is available for payments of international indebtedness at an approximately constant rate in terms of the national currency, it is a matter of comparative indifference whether it actually forms the national currency... The Gold-Exchange Standard may be said to exist when gold does not circulate in a country to an appreciable extent, when the local currency is not necessarily redeemable in gold, but when the Government or Central Bank makes arrangements for the provision of foreign remittances in gold at a fixed maximum rate in terms of the local currency, the reserves necessary to provide these remittances being kept to a considerable extent abroad.

Its theoretical advantages were first set forth by Ricardo (i.e.David Ricardo,1824) at the time of the Bullionist Controversy. He laid it down that a currency is in its most perfect state when it consists of a cheap material, but having an equal value with the gold it professes to represent; and he suggested that convertibility for the purposes of the foreign exchanges should be ensured by the tendering on demand of gold bars (not coin) in exchange for notes, so that gold might be available for purposes of export only, and would be prevented from entering into the internal circulation of the country.

The first crude attempt in recent times at establishing a standard of this type was made by Holland. The free coinage of silver was suspended in 1877. But the currency continued to consist mainly of silver and paper. It has been maintained since that date at a constant value in terms of gold by the Bank's regularly providing gold when it is required for export and by its using its authority at the same time for restricting so far as possible the use of gold at home. To make this policy possible, the Bank of Holland has kept a reserve, of a moderate and economical amount, partly in gold, partly in foreign bills.

Since the Indian system (gold exchange standard implemented in 1893) has been perfected and its provisions generally known, it has been widely imitated both in Asia and elsewhere... Something similar has existed in Java under Dutch influences for many years... The Gold-Exchange Standard is the only possible means of bringing China onto a gold basis...

The classical gold standard of the late 19th century was therefore not merely a superficial switch from circulating silver to circulating gold. The bulk of silver currency was actually replaced by banknotes and token currency whose gold value was guaranteed by gold bullion and other reserve assets held inside central banks. In turn, the gold exchange standard was just one step away from modernfiat currencywith banknotes issued by central banks, and whose value is secured by the bank's reserve assets, but whose exchange value is determined by the central bank'smonetary policyobjectives on its purchasing power in lieu of a fixed equivalence to gold.

Rollout outside Europe

The final chapter of the classical gold standard ending in 1914 saw the gold exchange standard extended to many Asian countries by fixing the value of local currencies to gold or to the gold standard currency of a Western colonial power. TheNetherlands East Indiesguilder was the first Asian currency pegged to gold in 1875 via a gold exchange standard which maintained its parity with the goldDutch guilder.

Variousinternational monetary conferenceswere called up until 1892, with various countries actually pledging to maintain the limping standard of freely circulating legacy silver coins in order to prevent the further deterioration of the gold–silver ratio which reached 20 in the 1880s.After 1890 however, silver's price decline could not be prevented further and the gold–silver ratio rose sharply above 30.

In 1893 theIndian rupeeof 10.69 g fine silver was fixed at 16 British pence (or £1 = 15 rupees; gold–silver ratio 21.9), with legacy silver rupees remaining legal tender. In 1906 theStraits dollarof 24.26 g silver was fixed at 28 pence (or £1 = 84⁄7dollars; ratio 28.4).

Nearly similar gold standards were implemented in Japan in 1897, in the Philippines in 1903, and in Mexico in 1905 when the previousyenorpesoof 24.26 g silver was redefined to approximately 0.75 g gold or half aU.S. dollar(ratio 32.3). Japan gained the needed gold reserves after the Sino-Japanese War of 1894–1895. For Japan, moving to gold was considered vital for gaining access to Western capital markets.

"Rules of the Game"

In the 1920sJohn Maynard Keynesretrospectively developed the phrase "rules of the game" to describe how central banks would ideally implement a gold standard during the prewar classical era, assuming international trade flows followed the idealprice–specie flow mechanism.Violations of the "rules" actually observed during the classical gold standard era from 1873 to 1914, however, reveal how much more powerful national central banks actually are in influencing price levels and specie flows, compared to the "self-correcting" flows predicted by the price-specie flow mechanism.

Keynes premised the "rules of the game" on best practices of central banks to implement the pre-1914 international gold standard, namely:

• To substitute gold with fiat currency in circulation, so that gold reserves may be centralized
• To actually allow a prudently determined ratio of gold reserves to fiat currency of less than 100%, with the difference made up by other loans and invested assets, such reserve ratio amounts consistent withfractional reserve bankingpractices
• To exchange circulating currency for gold or other foreign currencies at a fixed gold price, and to freely permit gold imports and exports
• Central banks were actually allowed modest margins in exchange rates to reflect gold delivery costs while still adhering to the gold standard. To illustrate this point, France may ideally allow thepound sterling(worth 25.22 francs based on ratios of their gold content) to trade between so-calledgold pointsof 25.02F to 25.42F (plus or minus an assumed 0.20F/£ in gold delivery costs). France prevents sterling from climbing above 25.42F by delivering gold worth 25.22F or £1 (spending 0.20F for delivery), and from falling below 25.02F by the reverse process of ordering £1 in gold worth 25.22F in France (and again, minus 0.20F in costs).
• Finally, central banks were authorized to suspend the gold standard in times of war until it could be restored again as the contingency subsides.

Central banks were also expected to maintain the gold standard on the ideal assumption of international trade operating under theprice–specie flow mechanismproposed by economistDavid Humewherein:

• Countries which exported more goods would receive specie (gold or silver) inflows, at the expense of countries which imported those goods.
• More specie in exporting countries will result in higher price levels there, and conversely in lower price levels amongst countries spending their specie.
• Price disparities will self-correct as lower prices in specie-deficient will attract spending from specie-rich countries, until price levels in both places equalize again.

In practice, however, specie flows during the classical gold standard era failed to exhibit the self-corrective behavior described above. Gold finding its way back from surplus to deficit countries to exploit price differences was a painfully slow process, and central banks found it far more effective to raise or lower domestic price levels by lowering or raising domestic interest rates. High price level countries may raise interest rates to lower domestic demand and prices, but it may also trigger gold inflows from investors – contradicting the premise that gold will flow out of countries with high price levels. Developed economies deciding to buy or sell domestic assets to international investors also turned out to be more effective in influencing gold flows than the self-correcting mechanism predicted by Hume.

Another set of violations to the "rules of the game" involved central banks not intervening in a timely manner even as exchange rates went outside the "gold points" (in the example above, cases existed of the pound climbing above 25.42 francs or falling below 25.02 francs). Central banks were found to pursue other objectives other than fixed exchange rates to gold (like e.g., lower domestic prices, or stopping huge gold outflows), though such behavior is limited by public credibility on their adherence to the gold standard. Keynes described such violations occurring before 1913 by French banks limiting gold payouts to 200 francs per head and charging a 1% premium, and by the German Reichsbank partially suspending free payment in gold, though "covertly and with shame".

Some countries had limited success in implementing the gold standard even while disregarding such "rules of the game" in its pursuit of other monetary policy objectives. Inside theLatin Monetary Union,theItalian liraand theSpanish pesetatraded outside typical gold-standard levels of 25.02–25.42F/£ for extended periods of time:

• Italy tolerated in 1866 the issuance ofcorso forzoso(forced legal tender paper currency) worth less than the Latin Monetary Union franc. It also flooded the Union with low-valued subsidiary silver coins worth less than the franc. For the rest of the 19th century theItalian liratraded at a fluctuating discount versus the standard gold franc.
• In 1883 theSpanish pesetawent off the gold standard and traded below parity with the goldFrench franc.However, as the free minting of silver was suspended to the general public, the peseta had a floating exchange rate between the value of the gold franc and the silver franc. The Spanish government captured all profits from mintingduros(5-peseta coins) out of silver bought for less than 5 ptas. While total issuance was limited to prevent the peseta from falling below the silver franc, the abundance ofdurosin circulation prevented the peseta from returning at par with the gold franc. Spain's system where the silverdurotraded at a premium above its metallic value due to relative scarcity is called thefiduciary standardand was similarly implemented in the Philippines and other Spanish colonies in the end of the 19th century.

In the United States

See also:United States dollar

The price of gold, as denominated indollars,was steady until the collapse of theBretton Woods systemin the mid-1970s.

Inception

In the 1780s,Thomas Jefferson,Robert MorrisandAlexander Hamiltonrecommended to Congress that a decimal currency system be adopted by the United States. The initial recommendation in 1785 was asilver standardbased on theSpanish milled dollar(finalized at 371.25 grains or 24.0566 g fine silver), but in the final version of theCoinage Act of 1792Hamilton's recommendation to include a$10 gold eaglewas also approved, containing 247.5 grains (16.0377 g) fine gold. Hamilton therefore put theU.S. dollaron abimetallic standardwith a gold–silver ratio of 15.0.

American-issued dollars and cents remained less common in circulation than Spanish dollars andreales (1/8th dollar)for the next six decades until foreign currency was demonetized in 1857. $10 gold eagles were exported to Europe where it could fetch over ten Spanish dollars due to their higher gold ratio of 15.5. American silver dollars also compared favorably with Spanish dollars and were easily used for overseas purchases. In 1806 President Jefferson suspended the minting of exportable gold coins and silver dollars in order to divert theUnited States Mint's limited resources into fractional coins which stayed in circulation.

Pre-Civil War

The United States also embarked on establishing a national bank with theFirst Bank of the United Statesin 1791 and theSecond Bank of the United Statesin 1816. In 1836, PresidentAndrew Jacksonfailed to extend the Second Bank's charter, reflecting his sentiments against banking institutions as well as his preference for the use of gold coins for large payments rather than privately issued banknotes. The return of gold could only be possible by reducing the dollar's gold equivalence, and in theCoinage Act of 1834the gold–silver ratio was increased to 16.0 (ratio finalized in 1837 to 15.99 when the fine gold content of the $10 eagle was set at 232.2 grains or 15.0463 g).

Gold discoveries in Californiain 1848 and later in Australia lowered the gold price relative to silver; this drove silver money from circulation because it was worth more in the market than as money.Passage of the Independent Treasury Act of 1848 placed the U.S. on a strict hard-money standard. Doing business with the American government required gold or silver coins.

Government accounts were legally separated from the banking system. However, the mint ratio (the fixed exchange rate between gold and silver at the mint) continued to overvalue gold. In 1853, silver coins 50 cents and below were reduced in silver content and cannot be requested for minting by the general public (only the U.S. government can request for it). In 1857 the legal tender status of Spanish dollars and other foreign coinage was repealed. In 1857 the final crisis of the free banking era began as American banks suspended payment in silver, with ripples through the developing international financial system.

Post-Civil War

William McKinleyran for president on the basis of the gold standard.

Due to the inflationary finance measures undertaken to help pay for the U.S.Civil War,the government found it difficult to pay its obligations in gold or silver and suspended payments of obligations not legally specified in specie (gold bonds); this led banks to suspend the conversion of bank liabilities (bank notes and deposits) into specie. In 1862 paper money was made legal tender. It was afiat money(not convertible on demand at a fixed rate into specie). These notes came to be called "greenbacks".

After the Civil War, Congress wanted to reestablish the metallic standard at pre-war rates. The market price of gold in greenbacks was above the pre-war fixed price ($20.67 per ounce of gold) requiringdeflationto achieve the pre-war price. This was accomplished by growing the stock of money less rapidly than real output. By 1879 the market price of the greenback matched the mint price of gold, and according to Barry Eichengreen, the United States was effectively on the gold standard that year.

TheCoinage Act of 1873(also known as the Crime of ‘73) suspended the minting of the standard silver dollar (of 412.5 grains, 90% fine), the only fully legal tender coin that individuals could convert silver bullion into in unlimited (orFree silver) quantities, and right at the onset of the silver rush from the Comstock Lode in the 1870s. Political agitation over the inability of silver miners to monetize their produce resulted in theBland–Allison Actof 1878 andSherman Silver Purchase Actof 1890 which made compulsory the minting of significant quantities of the silverMorgan dollar.

With the resumption of convertibility on June 30, 1879, the government again paid its debts in gold, accepted greenbacks for customs and redeemed greenbacks on demand in gold. While greenbacks made suitable substitutes for gold coins, American implementation of the gold standard was hobbled by the continued over-issuance of silver dollars andsilver certificatesemanating from political pressures. Lack of public confidence in the ubiquitous silver currency resulted in a run on U.S. gold reserves during thePanic of 1893.

During the latter part of the nineteenth century the use of silver and a return to the bimetallic standard were recurrent political issues, raised especially byWilliam Jennings Bryan,thePeople's Partyand theFree Silvermovement. In 1900 the gold dollar was declared the standard unit of account and a gold reserve for government issued paper notes was established. Greenbacks, silver certificates, and silver dollars continued to be legal tender, all redeemable in gold.

Fluctuations in the U.S. gold stock, 1862–1877

US gold stock
1862	59 tons
1866	81 tons
1875	50 tons
1878	78 tons

The U.S. had a gold stock of 1.9 million ozt (59 t) in 1862. Stocks rose to 2.6 million ozt (81 t) in 1866, declined in 1875 to 1.6 million ozt (50 t) and rose to 2.5 million ozt (78 t) in 1878. Net exports did not mirror that pattern. In the decade before the Civil War net exports were roughly constant; postwar they varied erratically around pre-war levels but fell significantly in 1877 and became negative in 1878 and 1879. The net import of gold meant that the foreign demand for American currency to purchase goods, services, and investments exceeded the corresponding American demands for foreign currencies. In the final years of the greenback period (1862–1879), gold production increased while gold exports decreased. The decrease in gold exports was considered by some to be a result of changing monetary conditions. The demands for gold during this period were as a speculative vehicle, and for its primary use in the foreign exchange markets financing international trade. The major effect of the increase in gold demand by the public and Treasury was to reduce exports of gold and increase the Greenback price of gold relative to purchasing power.

Abandonment of the gold standard

Impact of World War I

Governments with insufficient tax revenue suspendedconvertibilityrepeatedly in the 19th century. The real test, however, came in the form ofWorld War I,a test which "it failed utterly" according to economistRichard Lipsey.The gold specie standard came to an end in the United Kingdom and the rest of the British Empire with the outbreak ofWorld War I.

By the end of 1913, the classical gold standard was at its peak, but World War I caused many countries to suspend or abandon it.According to Lawrence Officer the main cause of the gold standard's failure to resume its previous position after World War I was "the Bank of England's precarious liquidity position and the gold-exchange standard". Arun on sterlingcaused Britain to imposeexchange controlsthat fatally weakened the standard; convertibility was not legally suspended, but gold prices no longer played the role that they did before.In financing the war and abandoning gold, many of the belligerents suffered drasticinflations.Price levels doubled in the U.S. and Britain, tripled in France and quadrupled in Italy. Exchange rates changed less, even though European inflation rates were more severe than America's. This meant that the costs of American goods decreased relative to those in Europe. Between August 1914 and spring of 1915, the dollar value of U.S. exports tripled, and its trade surplus exceeded $1 billion for the first time.

Ultimately, the system could not deal quickly enough with the largedeficits and surpluses;this was previously attributed to downward wage rigidity brought about by the advent ofunionized laborbut is now considered as an inherent fault of the system that arose under the pressures of war and rapid technological change. In any case, prices had not reached equilibrium by the time of theGreat Depression,which served to kill off the system completely.

For example,Germanyhad gone off the gold standard in 1914 and could not effectively return to it becausewar reparationshad cost it much of its gold reserves. During theoccupation of the Ruhrthe German central bank (Reichsbank) issued enormous sums of non-convertible marks to support workers who were on strike against the French occupation and to buy foreign currency for reparations; this led to theGerman hyperinflation of the early 1920sand the decimation of the German middle class.

The U.S. did not suspend the gold standard during the war. The newly createdFederal Reserveintervened in currency markets and sold bonds to "sterilize"some of the gold imports that would have otherwise increased the stock of money.By 1927 many countries had returned to the gold standard.As a result of World War I the United States, which had been a net debtor country, had become a net creditor by 1919.

Interwar period

The gold specie standard ended in the United Kingdom and the rest of the British Empire at the outbreak of World War I, when Treasury notes replaced the circulation of gold sovereigns and gold half sovereigns. Legally, the gold specie standard was not abolished. The end of the gold standard was successfully effected by the Bank of England through appeals to patriotism urging citizens not to redeem paper money for gold specie. It was only in 1925, when Britain returned to the gold standard in conjunction with Australia and South Africa, that the gold specie standard was officially ended.

Gold Standard Act 1925
Act of Parliament
Parliament of the United Kingdom
Long title	An Act to facilitate the return to a gold standard and for purposes connected therewith.
Citation	15 & 16 Geo. 5.c. 29
Dates
Royal assent	13 May 1925

The BritishGold Standard Act 1925both introduced the gold bullion standard and simultaneously repealed the gold specie standard.The new standard ended the circulation of gold specie coins. Instead, the law compelled the authorities to sell gold bullion on demand at a fixed price, but "only in the form of bars containing approximately four hundredounces troy[12 kg] offine gold".John Maynard Keynes,citing deflationary dangers, argued against resumption of the gold standard.By fixing the price at a level which restored the pre-war exchange rate of US$4.86 per pound sterling, asChancellor of the Exchequer,Churchillis argued to have made an error that led to depression, unemployment and the1926 general strike.The decision was described byAndrew Turnbullas a "historic mistake".

The pound left the gold standard in 1931 and a number of currencies of countries that historically had performed a large amount of their trade in sterling were pegged to sterling instead of to gold. The Bank of England took the decision to leave the gold standard abruptly and unilaterally.

Great Depression

Main article:Great Depression

Ending the gold standard and economic recovery during theGreat Depression

Many other countries followed Britain in returning to the gold standard, leading to a period of relative stability but also deflation.This state of affairs lasted until theGreat Depression(1929–1939) forced countries off the gold standard.Primary-producing countries were first to abandon the gold standard.In the summer of 1931, a Central European banking crisis led Germany and Austria to suspend gold convertibility and impose exchange controls.A May 1931runonAustria's largest commercial bankhad caused it tofail.The run spread to Germany, where the central bank also collapsed. International financial assistance was too late and in July 1931 Germany adopted exchange controls, followed by Austria in October. The Austrian and German experiences, as well as British budgetary and political difficulties, were among the factors that destroyed confidence in sterling, which occurred in mid-July 1931. Runs ensued and the Bank of England lost much of its reserves.

On September 19, 1931, speculative attacks on the pound led the Bank of England to abandon the gold standard, ostensibly "temporarily".However, the ostensibly temporary departure from the gold standard had unexpectedly positive effects on the economy, leading to greater acceptance of departing from the gold standard.Loans from American and French central banks of £50 million were insufficient and exhausted in a matter of weeks, due to large gold outflows across the Atlantic.The British benefited from this departure. They could now use monetary policy to stimulate the economy. Australia and New Zealand had already left the standard and Canada quickly followed suit.

The interwar partially backed gold standard was inherently unstable because of the conflict between the expansion of liabilities to foreign central banks and the resulting deterioration in the Bank of England's reserve ratio. France was then attempting to make Paris a world class financial center, and it received large gold flows as well.

Upon taking office in March 1933, U.S. President Franklin D. Roosevelt departed from the gold standard.

By the end of 1932, the gold standard had been abandoned as a global monetary system.Czechoslovakia, Belgium, France, the Netherlands and Switzerland abandoned the gold standard in the mid-1930s.According to Barry Eichengreen, there were three primary reasons for the collapse of the gold standard:

1. Tradeoffs between currency stability and other domestic economic objectives:Governments in the 1920s and 1930s faced conflictual pressures between maintaining currency stability and reducing unemployment.Suffrage,trade unions,and labor parties pressured governments to focus on reducing unemployment rather than maintaining currency stability.
2. Increased risk of destabilizing capital flight:International finance doubted the credibility of national governments to maintain currency stability, which led tocapital flightduring crises, which aggravated the crises.
3. The U.S., not Britain, was the main financial center:Whereas Britain had during past periods been capable of managing a harmonious international monetary system, the U.S. was not.

Causes of the Great Depression

Main article:Causes of the Great Depression

Economists, such asBarry Eichengreen,Peter TeminandBen Bernanke,allocate at least part of the blame for prolonging theeconomic depressionon the gold standard of the 1920s. TheGreat Depressionstarted in 1929 and lasted for about a decade.The gold standard theory of the Depression has been described as the "consensus view" among economists.This view is based on two arguments: "(1) Under the gold standard, deflationary shocks were transmitted between countries and, (2) for most countries, continued adherence to gold prevented monetary authorities from offsetting banking panics and blocked their recoveries."However, a 2002 paper argues that the second argument would only apply "to small open economies with limited gold reserves. This was not the case for the United States, the largest country in the world, holding massive gold reserves. The United States was not constrained from using expansionary policy to offset banking panics, deflation, and declining economic activity."According to Edward C. Simmons, in the United States, adherence to the gold standard prevented the Federal Reserve from expanding the money supply to stimulate the economy, fund insolvent banks and fund government deficits that could "prime the pump" for an expansion. Once off the gold standard, it became free to engage in suchmoney creation.The gold standard limited the flexibility of the central banks' monetary policy by limiting their ability to expand the money supply. In the US, the central bank was required by theFederal Reserve Act(1913) to have gold backing 40% of its demand notes.A 2024 study in theAmerican Economic Reviewfound that for a sample of 27 countries, leaving the gold standard helped states to recover from the Great Depression.

Higher interest rates intensified the deflationary pressure on the dollar and reduced investment in U.S. banks. Commercial banks convertedFederal Reserve Notesto gold in 1931, reducing its gold reserves and forcing a corresponding reduction in the amount of currency in circulation. Thisspeculativeattack created a panic in the U.S. banking system. Fearing imminent devaluation many depositors withdrew funds from U.S. banks.As bank runs grew, a reverse multiplier effect caused a contraction in the money supply.Additionally the New York Fed had loaned over$150 millionin gold (over 240 tons) to European Central Banks. This transfer contracted the U.S. money supply. The foreign loans became questionable onceBritain,Germany, Austria and other European countries went off the gold standard in 1931 and weakened confidence in the dollar.

The forced contraction of the money supply resulted in deflation. Even as nominal interest rates dropped, deflation-adjusted real interest rates remained high, rewarding those who held onto money instead of spending it, further slowing the economy.Recovery in the United States was slower than in Britain, in part due to Congressional reluctance to abandon the gold standard and float the U.S. currency as Britain had done.

In the early 1930s, the Federal Reserve defended the dollar by raising interest rates, trying to increase the demand for dollars. This helped attract international investors who bought foreign assets with gold.

Congress passed theGold Reserve Acton 30 January 1934; the measure nationalized all gold by ordering Federal Reserve banks to turn over their supply to the U.S. Treasury. In return, the banks received gold certificates to be used as reserves against deposits and Federal Reserve notes. The act also authorized the president to devalue the gold dollar. Under this authority, the president, on 31 January 1934, changed the value of the dollar from$20.67to thetroy ounceto$35to the troy ounce, a devaluation of over 40%.

Other causal factors, or factors in the prolongation of the Great Depression includetrade warsand the reduction ininternational tradecaused by barriers such asSmoot–Hawley Tariffin the U.S.and theImperial Preferencepolicies of Great Britain, the failure of central banks to act responsibly,government policies designed to prevent wages from falling, such as theDavis–Bacon Actof 1931, during the deflationary period resulting in production costs dropping slower than sales prices, thereby injuring business profitsand increases in taxes to reduce budget deficits and to support new programs such asSocial Security.The U.S. top marginal income tax rate went from 25% to 63% in 1932 and to 79% in 1936,while the bottom rate increased over tenfold, from.375% in 1929 to 4% in 1932.The concurrent massive drought resulted in the U.S.Dust Bowl.

TheAustrian Schoolargued that the Great Depression was the result of a credit bust.Alan Greenspanwrote that the bank failures of the 1930s were sparked by Great Britain dropping the gold standard in 1931. This act "tore asunder" any remaining confidence in the banking system.Financial historianNiall Fergusonwrote that what made the Great Depression truly 'great' was theEuropean banking crisis of 1931.According to Federal Reserve ChairmanMarriner Eccles,the root cause was the concentration of wealth resulting in a stagnating or decreasing standard of living for the poor and middle class. These classes went into debt, producing the credit explosion of the 1920s. Eventually, the debt load grew too heavy, resulting in the massive defaults and financial panics of the 1930s.

Bretton Woods

Main article:Bretton Woods system

Under theBretton Woods international monetary agreement of 1944,the gold standard was kept without domestic convertibility. The role of gold was severely constrained, as other countries' currencies were fixed in terms of the dollar. Many countries kept reserves in gold and settled accounts in gold. Still, they preferred to settle balances with other currencies, with the US dollar becoming the favorite. TheInternational Monetary Fundwas established to help with the exchange process and assist nations in maintaining fixed rates. Within Bretton Woods adjustment was cushioned through credits that helped countries avoid deflation. Under the old standard, a country with an overvalued currency would lose gold and experience deflation until the currency was again valued correctly. Most countries defined their currencies in terms of dollars, but some countries imposed trading restrictions to protect reserves and exchange rates. Therefore, most countries' currencies were still basically inconvertible. In the late 1950s, the exchange restrictions were dropped and gold became an important element in international financial settlements.

After theSecond World War,a system similar to a gold standard and sometimes described as a "gold exchange standard" was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the U.S. dollar and central banks could exchange dollar holdings into gold at the official exchange rate of$35per ounce; this option was not available to firms or individuals. All currencies pegged to the dollar thereby had a fixed value in terms of gold.Since private parties could not exchange gold at the official rate, market prices fluctuated. Large jumps in the market price 1960 lead to the creation of theLondon Gold Pool.

Starting in the 1959–1969 administration of PresidentCharles de Gaulleand continuing until 1970, France reduced its dollar reserves, exchanging them for gold at the official exchange rate, reducing U.S. economic influence. This, along with the fiscal strain of federal expenditures for theVietnam Warand persistent balance of payments deficits, led U.S. PresidentRichard Nixonto end international convertibility of the U.S. dollar to gold on August 15, 1971 (the "Nixon Shock").

This was meant to be a temporary measure, with the gold price of the dollar and the official rate of exchanges remaining constant. Revaluing currencies was the main purpose of this plan. No official revaluation or redemption occurred. The dollar subsequently floated. In December 1971, the "Smithsonian Agreement"was reached. In this agreement, the dollar was devalued from$35per troy ounce of gold to$38.Other countries' currencies appreciated. However, gold convertibility did not resume. In October 1973, the price was raised to$42.22.Once again, the devaluation was insufficient. Within two weeks of the second devaluation the dollar was left to float. The$42.22par value was made official in September 1973, long after it had been abandoned in practice. In October 1976, the government officially changed the definition of the dollar; references to gold were removed from statutes. From this point, theinternational monetary systemwas made of purefiat money.However, gold has persisted as a significant reserve asset since the collapse of the classical gold standard.

Modern gold production

An estimated total of 174,100tonnesof gold have been mined in human history, according toGFMSas of 2012. This is roughly equivalent to 5.6 billiontroy ouncesor, in terms of volume, about 9,261 cubic metres (327,000 cu ft), or acube21 metres (69 ft) on a side. There are varying estimates of the total volume of gold mined. One reason for the variance is that gold has been mined for thousands of years. Another reason is that some nations are not particularly open about how much gold is being mined. In addition, it is difficult to account for the gold output in illegal mining activities.

World production for 2011 was circa 2,700tonnes.Since the 1950s, annual gold output growth has approximately kept pace withworld populationgrowth (i.e. a doubling in this period)although it has lagged behind world economic growth (an approximately eightfold increase since the 1950s,and fourfold since 1980.

Reintroduction

In 2024,Zimbabwebecame the first country in the 21st century to use a gold standard for its currency, in order to tackle inflation and create confidence within the economy. TheZimbabwe Gold(ZiG) is backed by US$400 million and 2,522 kg of gold, thus giving a total of US$575 million worth of hard assets. This development came after theZimdollarcrashed based on official rate from US$1:ZWL2.50 at introduction to US$1:ZWL30,672.42 on 5 April 2024, whilst parallel market was trading at US$1:ZWL42,500 at the time of removal.

Theory

Commodity moneyis inconvenient to store and transport in large amounts. Furthermore, it does not allow a government to manipulate the flow of commerce with the same ease that a fiat currency does. As such, commodity money gave way torepresentative moneyand gold and otherspeciewere retained as its backing.

Gold was a preferred form of money due to its rarity, durability, divisibility,fungibilityand ease of identification,often in conjunction with silver. Silver was typically the main circulating medium, with gold as the monetary reserve. Commodity money was anonymous, as identifying marks can be removed. Commodity money retains its value despite what may happen to the monetary authority. After the fall ofSouth Vietnam,many refugees carried their wealth to the West in gold after the national currency became worthless.

Under commodity standards currency itself has no intrinsic value but is accepted by traders because it can be redeemed any time for the equivalent specie. A U.S.silver certificate,for example, could be redeemed for an actual piece of silver.

Representative money and the gold standard protect citizens fromhyperinflationand other abuses of monetary policy, as were seen in some countries during the Great Depression. Commodity money conversely led to deflation.

Countries that left the gold standard earlier than other countries recovered from the Great Depression sooner. For example, Great Britain and the Scandinavian countries, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost entirely avoided the depression (due to the fact it was then barely integrated into the global economy). The connection between leaving the gold standard and the severity and duration of the depression was consistent for dozens of countries, including developing countries. This may explain why the experience and length of the depression differed between national economies.

Variations

Afull or 100%-reservegold standard exists when the monetary authority holds sufficient gold to convert all the circulating representative money into gold at the promised exchange rate. It is sometimes referred to as the gold specie standard to more easily distinguish it. Opponents of a full standard consider it difficult to implement, saying that the quantity of gold in the world is too small to sustain worldwide economic activity at or near current gold prices; implementation would entail a many-fold increase in the price of gold.Gold standard proponents have said, "Once a money is established, any stock of money becomes compatible with any amount of employment and real income."While prices would necessarily adjust to the supply of gold, the process may involve considerable economic disruption, as was experienced during earlier attempts to maintain gold standards.

In aninternational gold-standard system(which is necessarily based on an internal gold standard in the countries concerned),gold or a currency that is convertible into gold at a fixed price is used to make international payments. Under such a system, when exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold, inflows or outflows occur until rates return to the official level. International gold standards often limit which entities have the right to redeem currency for gold.

Impact

A poll of 39 prominent U.S. economists conducted by the IGM Economic Experts Panel in 2012 found that none of them believed that returning to the gold standard would improve price-stability and employment outcomes. The specific statement with which the economists were asked to agree or disagree was: "If the U.S. replaced its discretionary monetary policy regime with a gold standard, defining a 'dollar' as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American." 40% of the economists disagreed, and 53% strongly disagreed with the statement; the rest did not respond to the question. The panel of polled economists included past Nobel Prize winners, former economic advisers to both Republican and Democratic presidents, and senior faculty from Harvard, Chicago, Stanford, MIT, and other well-known research universities.A 1995 study reported on survey results among economic historians showing that two-thirds of economic historians disagreed that the gold standard "was effective in stabilizing prices and moderating business-cycle fluctuations during the nineteenth century."

Advantages

According to economistMichael D. Bordo,the gold standard has three benefits: "its record as a stable nominal anchor; its automaticity; and its role as a credible commitment mechanism":

• A gold standard does not allow some types offinancial repression.Financial repression acts as a mechanism to transfer wealth from creditors to debtors, particularly the governments that practice it. Financial repression is most successful in reducing debt when accompanied by inflation and can be considered a form oftaxation.In 1966Alan Greenspanwrote "Deficit spendingis simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard. "
• Long-termprice stabilityhas been described as one of the virtues of the gold standard,but historical data shows that the magnitude of short run swings in prices were far higher under the gold standard.
• Currency criseswere less frequent under the gold standard than in periods without the gold standard.However, banking crises were more frequent.
• The gold standard provides fixed international exchange rates between participating countries and thus reduces uncertainty in international trade. Historically, imbalances between price levels were offset by a balance-of-payment adjustment mechanism called the "price–specie flow mechanism".Gold used to pay for imports reduces the money supply of importing nations, causing deflation, which makes them more competitive, while the importation of gold by net exporters serves to increase their money supply, causing inflation, making them less competitive.
• Hyper-inflation, a common correlator with government overthrows and economic failures, is more difficult when a gold standard exists. This is because hyper-inflation, by definition, is a loss in trust of failing fiat and those governments that create the fiat.

Disadvantages

Gold prices (US dollars per troy ounce) from 1914, in nominal US dollars and inflation adjusted US dollars

• The unequal distribution of gold deposits makes the gold standard more advantageous for those countries that produce gold.In 2010 the largest producers of gold, in order, were China, Australia, the U.S., South Africa, and Russia.The country with the largest unmined gold deposits is Australia.
• Some economists believe that the gold standard acts as a limit on economic growth. According to David Mayer, "As an economy's productive capacity grows, then so should its money supply. Because a gold standard requires that money be backed in the metal, then the scarcity of the metal constrains the ability of the economy to produce more capital and grow."
• Mainstream economistsbelieve that economic recessions can be largely mitigated by increasing the money supply during economic downturns.A gold standard means that the money supply would be determined by the gold supply and hence monetary policy could no longer be used to stabilize the economy.
• Although the gold standard brings long-run price stability, it is historically associated with high short-run pricevolatility.It has been argued by Schwartz, among others, that instability in short-term price levels can lead to financial instability as lenders and borrowers become uncertain about the value of debt.Historically, discoveries of gold and rapid increases in gold production have caused volatility.
• Deflation punishes debtors.Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. Lenders become wealthier, but may choose to save some of the additional wealth, reducingGDP.
• The money supply would essentially be determined by the rate of gold production. When gold stocks increase more rapidly than the economy, there is inflation and the reverse is also true.The consensus view is that the gold standard contributed to the severity and length of the Great Depression, as under the gold standard central banks could not expand credit at a fast enough rate to offset deflationary forces.
• Hamilton contended that the gold standard is susceptible tospeculative attackswhen a government's financial position appears weak. Conversely, this threat discourages governments from engaging in risky policy(seemoral hazard).For example, the U.S. was forced to contract the money supply and raise interest rates in September 1931 to defend the dollar after speculators forced the UK off the gold standard.
• Devaluing a currency under a gold standard would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation.
• Most economists favor a low, positive rate of inflation of around 2%. This reflects fear of deflationary shocks and the belief that active monetary policy can dampen fluctuations in output and unemployment. Inflation gives them room to tighten policy without inducing deflation.
• A gold standard provides practical constraints against the measures that central banks might otherwise use to respond to economic crises.Creation of new money reduces interest rates and thereby increases demand for new lower cost debt, raising the demand for money.
• The late emergence of the gold standard may in part have been a consequence of its higher value than other metals, which made it unpractical for most laborers to use in everyday transactions (relative to less valuable silver coins).

Advocates

A return to the gold standard was considered by the U.S. Gold Commission in 1982 but found only minority support.In 2001Malaysian Prime MinisterMahathir Mohamadproposed a new currency that would be used initially for international trade among Muslim nations, using amodern Islamic gold dinar,defined as 4.25 grams of pure (24-carat) gold. Mahathir claimed it would be a stable unit of account and a political symbol of unity between Islamic nations. This would purportedly reduce dependence on the U.S. dollar and establish a non-debt-backed currency in accord withSharia lawthat prohibited the charging of interest.However, this proposal has not been taken up, and the global monetary system continues to rely on the U.S. dollar as the main trading andreserve currency.

FormerU.S. Federal ReserveChairman Alan Greenspan acknowledged he was one of "a small minority" within the central bank that had some positive view on the gold standard.In a 1966 essay he contributed to a book byAyn Rand,titledGold and Economic Freedom,Greenspan argued the case for returning to a 'pure' gold standard; in that essay he described supporters of fiat currencies as "welfare statists" intending to use monetary policy to finance deficit spending.More recently he claimed that by focusing on targeting inflation "central bankers have behaved as though we were on the gold standard", rendering a return to the standard unnecessary.Similarly, economists likeRobert Barroargued that whilst some form of "monetary constitution" is essential for stable, depoliticized monetary policy, the form this constitution takes – for example, a gold standard, some other commodity-based standard, or a fiat currency with fixed rules for determining the quantity of money – is considerably less important.

The gold standard is supported by many followers of theAustrian School of economics,free-market libertarians,and somesupply-siders.

U.S. politics

Former congressmanRon Paulis a long-term, high-profile advocate of a gold standard, but has also expressed support for using a standard based on a basket of commodities that better reflects the state of the economy.

In 2011 theUtahlegislature passed abillto accept federally issued gold and silver coins as legal tender to pay taxes.As federally issued currency, the coins were already legal tender for taxes, although the market price of their metal content currently exceeds their monetary value. As of 2011 similar legislation was under consideration in other U.S. states.The bill was initiated by newly electedRepublican Partylegislatorsassociated with theTea Party movementand was driven by anxiety over the policies of PresidentBarack Obama.

In 2013, theArizona Legislaturepassed SB 1439, which would have made gold and silver coin a legal tender in payment of debt, but the bill was vetoed by the Governor.

In 2015, some Republican candidates for the2016 presidential electionadvocated for a gold standard, based on concern that theFederal Reserve's attempts to increase economic growth may create inflation. Economic historians did not agree with the candidates' assertions that the gold standard would benefit the U.S. economy.

See also

• A Program for Monetary Reform(1939) – The Gold Standard
• Black Friday (1869)—Also referred to as theGold Panic of 1869
• Executive Order 6102
• Full-reserve banking
• Gold as an investment
• Gold dinar
• Gold points
• Hard money (policy)
• Metal as money
• Metallism

International institutions

• Bank for International Settlements
• International Monetary Fund
• United Nations Monetary and Financial Conference
• World Bank

References

Sources

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• Drummond, Ian M. The Gold Standard and the International Monetary System 1900–1939. Macmillan Education, LTD, 1987.
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Further reading

• Banking in modern Japan.Tokyo:Fuji Bank.1967.ISBN978-0-333-71139-2.OCLC254964565.
• Bensel, Richard Franklin(2000).The political economy of American industrialization, 1877–1900.Cambridge:Cambridge University Press.ISBN978-0-521-77604-2.OCLC43552761.
• Bernanke, Ben;James, Harold (October 1990)."The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison".NBER Working Paper No. 3488.doi:10.3386/w3488.Also published as:Bernanke, Ben;James, Harold (1991)."The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison".InR. Glenn Hubbard(ed.).Financial markets and financial crises.Chicago:University of Chicago Press.pp. 33–68.ISBN978-0-226-35588-7.OCLC231281602.
• Bordo, Michael D.(1999).Gold standard and related regimes: collected essays.Cambridge:Cambridge University Press.ISBN978-0-521-55006-2.OCLC59422152.
• Bordo, Michael D;Anna Jacobson Schwartz;National Bureau of Economic Research(1984).A Retrospective on the classical gold standard, 1821–1931.Chicago:University of Chicago Press.ISBN978-0-226-06590-8.OCLC10559587.
• Coletta, Paolo E."Greenbackers, Goldbugs, and Silverites: Currency Reform and Politics, 1860-1897,”in H. Wayne Morgan (ed.), The Gilded Age: A Reappraisal. Syracuse, NY: Syracuse University Press, 1963; pp. 111–139.
• Eichengreen, Barry J.;Marc Flandreau (1997).The gold standard in theory and history.New York City:Routledge.ISBN978-0-415-15061-3.OCLC37743323.
• Einaudi, Luca (2001).Money and politics: European monetary unification and the international gold standard (1865–1873).Oxford:Oxford University Press.ISBN978-0-19-924366-2.OCLC45556225.
• Roberts, Mark A (March 1995). "Keynes, the Liquidity Trap and the Gold Standard: A Possible Application of the Rational Expectations Hypothesis".The Manchester School of Economic & Social Studies.61(1): 82–92.doi:10.1111/j.1467-9957.1995.tb00270.x.
• Thompson, Earl A.; Charles Robert Hickson (2001).Ideology and the evolution of vital institutions: guilds, the gold standard, and modern international cooperation.Boston: Kluwer Acad. Publ.ISBN978-0-7923-7390-2.OCLC46836861.
• Pollard, Sidney (1970).The gold standard and employment policies between the Wars.London:Methuen.ISBN978-0-416-14250-1.OCLC137456.
• Hanna, Hugh Henry;Charles Arthur Conant;Jeremiah Jenks(1903).Stability of international exchange: Report on the introduction of the gold-exchange standard into China and other silver-using countries.OCLC6671835.
• Drummond, Ian M.;The Economic History Society(1987).The gold standard and the international monetary system 1900–1939.Houndmills, Basingstoke, Hampshire: Macmillan Education.ISBN978-0-333-37208-1.OCLC18324084.
• Hawtrey, Ralph George(1927).The Gold Standard in theory and practice.London:Longman.ISBN978-0-313-22104-0.OCLC250855462.
• Flandreau, Marc (2004).The glitter of gold: France, bimetallism, and the emergence of the international gold standard, 1848–1873.Oxford:Oxford University Press.ISBN978-0-19-925786-7.OCLC54826941.
• Lalor, John (2003) [1881].Cyclopedia of Political Science, Political Economy and the Political History of the United States.London: Thoemmes Continuum.ISBN978-1-84371-093-6.OCLC52565505.
• Rothbard, Murray Newton(2006)."The World Currency Crisis".Making Economic Sense.Burlingame, California:Ludwig von Mises Institute.pp. 295–299.ISBN978-0-945466-46-8.OCLC78624652.
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External links

• 1925: Churchill & The Gold Standard - UK Parliament Living Heritage
• What is The Gold Standard?University of Iowa Center for International Finance and Development
• History of the Bank of EnglandBank of England
• Timeline: Gold's history as a currency standard