Gold standard is a system that relates a unit of account weight to gold. It comes in many forms. Gold specie standards, which use actual gold coins or mix gold with less valuable metals, often refer to an ancient system for purchasing power.
What is Gold Standard?
Gold exchange standard is the exchange of lesser-valued metals for a set exchange rate between participating countries that use the gold standard. This method becomes a gold standard de facto, as the silver coin value is fixed and can be traded for gold. Gold bullion does not circulate gold coins, but instead grants the authorities the ability to buy gold at a fixed, agreed-upon price and exchange it for currency.
- Gold Standard: An explanation of what the Gold Standard is, the derivatives it contains, as well as the advantages and disadvantages of an economy that uses this type of currency system.
- Library Economics and Liberty : Comprehensive resource that explains the formalities and performance results, as well as the preferred and non-preferential factors, involved with using gold standard economics premise.
Gold Standard History
Gold specie was accepted by all governments as an international currency. Byzant, a gold coin, was used by the Byzantine Empire. Due to silver’s abundance, it became a form of money over the years. In modern times, the British West Indies were one of first to adopt a gold standard. British West Indies continued to use the gold specie until Queen Anne’s 1704 proclamation forced the de facto standard of gold with Spanish gold coins.
The Gold Eagle was the only unit of currency in the United States. Germany adopted a gold standard, while Canada implemented a dual-system modeled on the American Gold Eagle coin and the British Gold Sovereign. Australia, New Zealand, and British West Indies all adopted the British Gold Standard, with Royal Mint branches in Sydney, New South Wales and Victoria. Perth and Melbourne, Western Australia, were also part of the system.
War and commerce with China depleted Western Europe and America of their silver coins, leading to the proliferation of stock and band notes. The United States adopted the Spanish milled-dollar standard in 1785. In 1792, the Mind and Coinage Act gave the Bank of the United States the right to keep its gold reserves and to create a fixed ratio of one dollar to gold. The 1792 Mind and Coinage Act created a derivative standard of silver, which didn’t require banks to support the currency in physical silver. Independent Treasury Act of 1848, removed legal restrictions of Federal Government and banking system. This led to an overvaluation of Silver. The California Gold Rush, or the California Gold Rush, was sparked by the overvaluation of silver, the currency at the time. After a decrease in the value of silver in 1853, in 1857, the United States removed it as legal tender.
When the United States stopped paying in silver, it sent shockwaves through international finance. The collapse of the American Civil War was a result of this. The culmination of other international events eventually led to the fiat currency system. World Wars caused high inflation in most countries who decided to abandon the gold standard. After the standard was restored, the levels of inflation varied.
Federal Reserved raised interest rates to defend the dollar’s fixed value in a direct comparison with the gold derivative standard. The Federal Reserve’s decisive approach led to the reluctance to increase money supply. The higher rates of interest attracted international investors, who purchased foreign assets using gold. However, they intensified deflationary spirals, reducing interest in U.S. banking institutions. In 1931, private banks converted Federal Reserve Notes into gold. This further decreased the Federal Reserve gold reserves. This reduction of gold caused a drop in Federal Notes, causing a panic in the U.S. Banking Sector. Part of the slow recovery could be attributed to Congress’ refusal to abandon gold standards.
After the Second World War, Bretton Woods was created as an “gold standard of exchange.” Many countries set their exchange rate in relation to the U.S. Dollar. The U.S. agreed to set the price of their gold at approximately 35 dollars an ounce. Charles de Gaulle, the French president decided to exchange his dollar reserves for gold. The U.S.’s gold reserves began to diminish as a result. This, combined with the economic hardships caused by the Vietnam War, forced Nixon to remove the U.S. entirely from the gold standard in 1971.
- Iowa State University – The evolution of international monetary systems: A timeline explaining the development of the global money system since ancient empires.
- Harvard University – The Gold Standard in the Great Depression (PDF).: How the Gold Standard worsened deflation instead of accelerating the recovery.
- University of Berkeley Did the Federal Reserve Feel Constraints by the Gold Standard during the Great Depression? Evidence from the Open Market purchase system (PDF) A comprehensive document that provides evidence suggesting the Federal Reserve was constrained by Gold Standard in the Great Depression.
Arguments in favor of the Gold Standard
Gold Standard or a currency backed by gold has many advantages, including a price stabilization over the long term. A gold standard policy does not allow hyperinflation to occur because money can only increase at the same rate as gold. Money expansions and the pursuit of goods by currency are rare, as gold can only be used for money when it is minted in coins. Gold standard inflation is only high when wars reduce the supply of goods, or when gold prices increase dramatically, as they did during World War One and the California Gold Rush. Gold standard limits the government’s ability to increase prices through printing more money. The gold standard fixes exchange rates for countries who have adopted it and solidifies international trade relationships. The price levels of different countries will automatically adjust based on an automatic adjustment system known as price specie flows. Gold standard limits government spending and keeps deficits in check. As a final resort, a central bank cannot buy assets in unlimited quantities. It can also not produce unlimited money when gold is limited.
- Time: Gold Standard: Should America Return to it? An evaluation of the pros and con’s for reinstating the Gold Standard in the United States.
- National Public Radio Tuesday podcast: The Gold Standard Finance writer James Grant discusses key arguments behind reinstating the gold standard.
- Ron Paul, Sound Money Congressman Ron Paul and libertarian advocate Ron Paul argue over the need to return to the Gold Standard.
Arguments against Gold Standard
Gold standard disadvantages include a finite amount of resources. This includes an unmined global supply of 142 000 metric tons. Deflation rewards savers while penalizing those with debt. Deficit real rises, and borrowers are forced to reduce spending or default to repay their debts. It makes the lenders richer, but it may also cause them to start saving instead. Deflation prevents the central banks from encouraging spending. The mainstream economists believe that increasing money supply can bring about economic recessions. This option would be impossible with a gold standard. The price of gold mined could change, causing inflation if the value increases. If a country wanted to devalue its currency, it would have to make more drastic changes.
- Auburn University – The Costs Of A Gold Standard : An overview of benefits and costs of an economic policy based on the Gold Standard.
- Illinois Weselyan University : The Feasibility and Possibility of 100% Reserve Gold Standard : This paper addresses arguments that are slanted in opposition to a gold-backed currency.
Gold Standard Proponents:
Many supporters of a gold standard, including constitutionalists as well as objectivists, free-market libertarians and followers of Ausrtian School of Economics are opposed to government intervention by issuing fiat currencies through the “central banking cartel.” Gold standard supporters also support the end of fractional reserve system. Few politicians, however, agree that the implementation of the gold standard would rectify current economic problems. Alan Greenspan (former Chairman of the United States Federal Reserve), macroeconomist Robert Barro and U.S. Ron Paul, a congressman from Texas. Peter Schiff is another Austrian economist who has gained recognition for making controversial predictions which led to the Great Recession. Schiff supports a currency backed by gold and rejects quantitative easing, which is reflected in the monetary policies of Ben Beranke, the chairman of the U.S. Federal Reserve.
- USA Gold – Alan Greenspan: Gold, Economic Freedom : Greenspan explains his position on the reinstatement of the Gold Standard.
- The Gold Standard: A Pro-Gold Standard Paper that Addresses the Need to Reinstate a U.S. Gold-Backed Currency
- Dr. Ron Paul’s Gold Standard : Texas congressman Ron Paul claims that a gold standard would make the Federal Reserve obsolete.