Why We Left The Gold Standard : Planet Money : NPR

However, the increasing competitiveness of foreign nations combined with the monetization of debt to pay for social programs and the Vietnam War soon began to weigh on America’s balance of payments. Following the end of the agreement, the IMF allowed members to choose whichever exchange arrangement, allowing them to float against each other or a basket of currencies. Bretton Woods policies came into full effect in 1958 with mixed results, and the US dollar struggled to maintain parity with gold throughout much of the 1960s in part due to increased domestic and military spending. The agreement chose elements from both proposals but leaned in favor of White’s suggestion.

1. Interestingly, gold rushes in California in 1849 and Australia in 1851 flooded the markets with gold, causing a 30 percent increase in wholesale prices and altering the ratio between the metals in France.
2. In the U.S., for instance, the dollar is fiat money, and in Nigeria, the naira is.
3. Lastly, countries may implement a gold 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.
4. This took place at a time when the effects of rising interest rates in Europe led to gold ceasing to move into the United States.
5. This alleviated the pressure on member nations to appreciate their currencies to maintain their export-led growth strategies.

This higher price for gold increased the conversion of gold into U.S. dollars, effectively allowing the U.S. to corner the gold market. Gold production soared so that by 1939 there was enough in the world to replace all global currency in circulation. The U.S. Constitution in 1789 gave Congress the sole right to coin money and the power to regulate its value. Creating a united national currency enabled the standardization of a monetary system that had up until then consisted of circulating foreign coins, mostly silver. The gold standard was completely replaced by fiat money, a term to describe currency that is used because of a government’s order, or fiat, that the currency must be accepted as a means of payment.

Gold standard origin in Britain

The main tool was the discount rate (the rate at which the central bank would lend money to commercial banks or financial institutions) which would in turn influence market interest rates. A rise in interest rates would speed up the adjustment process through two channels. First, it would make borrowing more expensive, reducing investment spending and domestic demand, which in turn would put downward pressure on domestic prices, enhancing competitiveness and stimulating exports. Second, higher interest rates would attract money from abroad, improving the capital account of the balance of payments.

Planet Money

In an international gold-standard system (which is necessarily based on an internal gold standard in the countries concerned),[95] 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. An inflexible money supply in theory makes it harder for central banks to adjust for economic conditions. Perhaps more pertinently, history shows that when the gold standard has proved overly restrictive, governments simply abandon it. For example, most countries abandoned the gold standard between the First and Second World Wars.

Central banks and the gold exchange standard

A country that uses the gold standard sets a price for gold, and it buys and sells gold at that price. 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. 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. The Great Depression—the longest and most severe economic recession in modern history—was caused by a confluence of factors, with the gold standard being but one contributing element. Economists do not agree on a single explanation for the catastrophe but have noted that its key causes include the stock market crash of 1929 and protectionist trade policies.

The Gold Pool collapsed in 1968 as member nations were reluctant to cooperate fully in maintaining the market price at the U.S. price of gold. In the following years, both Belgium and the Netherlands cashed in dollars for gold, with Germany and France expressing similar intentions. As World War II was coming to an end, the leading Western powers met to develop the Bretton Woods Agreement, which would be the framework for the global currency markets until 1971.

The gold standard also played a role in the Great Depression, as it limited the ability of monetary policy to stabilize the economy. As mentioned above, Britain terminated the gold standard in 1931, and the U.S. did the same in pepperstone review 1933. In 1971, the U.S. fully severed the direct convertibility of dollars into gold. In the U.S., currency is backed by the government and its ability to continually generate revenue. In 1871, the newly unified Germany, benefiting from reparations paid by France following the Franco-Prussian war of 1870, took steps which essentially put it on a Gold Standard.

The first crude attempt in recent times at establishing a standard of this type was made by Holland. 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. The United Kingdom slipped into a gold specie standard in 1717 by over-valuing gold at 15+1⁄5 times its weight in silver.

At the same time, a desire to return to the idyllic years of the gold standard remained strong among nations. As the gold supply continued to fall behind the growth of the global economy, the British pound sterling and the U.S. dollar became the global reserve currencies. The gold standard is a monetary system in which the value of a country’s currency is directly linked to gold. With the gold standard, countries agree to convert paper money into a fixed amount of gold.

If you’re not tied to gold, you can adjust the amount of money in the economy if you need to. Almost all economists agree, the system we have today is better than the gold standard. For the past six months at the LSE’s United States Centre, I have been working under the guidance of Professor James Morrison on helping augment his research manuscript on “The Decline and Fall of the Gold Standard”. The project itself tracks the attempts at the restoration of a cooperative international financial system in the interwar period, the Great Depression and failure of these attempts, and the ensuing policy departures from the Gold Standard tradition of the pre- and inter-war years. For my part in contributing to the project, I had to carry out research and develop certain ideas in the direction of two different fronts relating to German involvement in the international financial system. The second of these was to explore Hjalmar Schacht as a person in more depth & understand his policy perspective evolution until his trial for war crimes in Nuremberg in 1946.

In the U.S., for instance, the dollar is fiat money, and in Nigeria, the naira is. For example, if the U.S. hypothetically set the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold. With greater wealth and far more bitit review money supply today, the economy would face far more headwinds and more disastrous potential should there be a shift back towards a gold standard. This system helped to minimize volatility of exchange rates and facilitated international trade. The gold standard was further challenged in 1914 with the start of the First World War when major nations suspended the convertibility of domestic bank notes into gold and suspended the movement of gold over borders. Despite initial skepticism, the notes proved to be popular, and the idea spread across the continent.

President Richard Nixon to end international convertibility of the U.S. dollar to gold on August 15, 1971 (the “Nixon Shock”). A return to the gold standard would limit the Federal Reserve’s ability to print money and constrain its ability to enact monetary policy during critical economic events, such as recessions. Economists have also posited that a return to the gold standard would result in an economy that is more volatile, due to vulnerability to shocks in supply and demand for gold. Central bankers and economists are largely unanimous against the idea of returning to a gold standard. In August 1971, Nixon severed the direct convertibility of U.S. dollars into gold.

Within the Bretton Woods system, all national currencies were valued in relation to the U.S. dollar, which became the dominant reserve currency. In 1819, England became the first country to officially adopt a gold standard. The century’s dramatic increase in global trade and production brought large discoveries of gold, which helped the gold standard remain intact well into the next century. One further factor which helped the maintenance of the standard was a degree of cooperation between central banks. For example, the Bank of England (during the Barings crisis of 1890 and again in ), the US Treasury (1893), and the German Reichsbank (1898) all received assistance from other central banks. A central bank could manipulate the gold points, using so-called ‘gold devices’ in order to increase or decrease the profitability of exporting gold and therefore the flow of gold.

Interestingly, gold rushes in California in 1849 and Australia in 1851 flooded the markets with gold, causing a 30 percent increase in wholesale prices and altering the ratio between the metals in France. These notes weren’t meant for widespread use, but their development eventually led a group of merchants to create a more formal system in Szechuan in the 10th century. Each was printed using anti-counterfeiting techniques and affixed with a seal from the issuing bank. Whoever held the banknote could have it converted back into metal at any time. Furthermore, it does not allow a government to manipulate the flow of commerce with the same ease that a fiat currency does.

The impact of Germany’s decision, coupled with the then economic and political dominance of the UK and the attraction of accessing London’s financial markets, was sufficient to encourage other countries to turn to gold. However, this transition to a pure Gold Standard, in some opinions, was more based on changes in the relative supply of silver and gold. Regardless, by 1900 all countries apart from China, and some Central American countries, were on a Gold Standard. Periodic attempts to return to a pure classical Gold Standard were made during the inter-war period, but none survived past the 1930s Great Depression. In theory, the international gold standard provided an inherent mechanism for stability in the financial system, as trade imbalances would be self-correcting. American-issued dollars and cents remained less common in circulation than Spanish dollars and reales (1/8th dollar) for the next six decades until foreign currency was demonetized in 1857.