History Lesson: What Happened to the Gold Standard?
For thousands of years, economists have puzzled over one core question: what gives paper money its value? Also called ‘fiat’ money, most modern economists argue that the currencies of large governments maintain value because they come with the implicit backing of a nation. Because you have faith that any reasonable vendor will accept United States Dollars as payment, supply and demand takes over and gives the currency value.
But there’s another type of economist that is not yet convinced that ‘fiat’ currency has intrinsic value. Instead, these monetary experts believe that paper currencies should be backed by a stable, inherently valuable commodity.
Enter: the gold standard. A gold standard refers to any monetary currency that is actually backed by physical precious metals, especially gold bullion.
Fun fact: the United States used to employ a gold standard! Over the course of hundreds of years, the government slowly did away with this ancient method of giving currencies value. Today, the value of the U.S. Dollar isn’t pegged to gold bullion, but is only valued because of the support of the United States Government.
So what happened to the gold standard? In this guide, we’re taking a closer look at the history of the gold standard – as well as its collapse. By the end of this guide, we’ll also introduce you to a few movements in the precious metals industry that are trying to return to the tradition of a gold standard for trade and commerce.
What is a Gold Standard?
A ‘gold standard’ refers to a monetary policy where a currency’s value is backed by physical gold bullion. For a period of time in the United States, each United States Dollar in circulation corresponded with actual gold held by the government. This isn’t the case anymore, but the gold standard’s collapse has become one of the most important economic issues to some politicians and Americans.
Benefits of the Gold Standard
There are several benefits to using the gold standard to back the value of a currency. We’ll highlight the two main upsides to the gold standard below: standardizing fiat currency value and promoting faith in paper money.
Let’s take a closer look at these two pros of the gold standard below.
Standardizing Fiat Currency Value
In a world where demand for gold bullion is relatively consistent, a gold standard can help to standardize the value of a currency. You’ll hear us refer to the term ‘fiat currency’ a lot in this guide. For new investors, a fiat currency is a paper currency used as legal tender within a country.
This isn’t to say that fiat currencies only have value if there’s a gold standard in place. Many modern economists believe that the backing of a legitimate government is enough to give a currency value. This is especially true when governments are effective at moderating the supply of their currency.
This helps to explain the importance of the Federal Reserve, which is responsible for taking steps to curb inflation and regulate interest rates. If there are too many United States Dollars in circulation, this means that each dollar is less valuable. It’s a careful balancing act, and the Fed’s decisions help to determine the value of our country’s currency.
Promoting Faith in Paper Money
But without the gold standard, the currencies of the world are only really as valuable as the Federal Reserve is effective. Under a gold standard, the circulation numbers of a currency are directly correlated with the amount of physical gold bullion that a country holds.
To some economists, the gold standard removes complexity from the equation. Under a gold standard, the government’s main role is to make sure that their currency is adequately backed by gold bullion.
A common complaint among gold stackers is that traditional currencies and investment-grade assets are not actually backed with intrinsic value. This is part of what makes gold such a popular investment; its inherent value helped it become the world’s most famous anti-inflation investment.
The U.S. Gold Standard – A History
The history of the U.S. gold standard really begins with the earliest years of the United States. Below, we’ll take you through a full history of what happened to the gold standard, from the very beginning of the monetary policy to its eventual collapse under Richard Nixon in 1971.
Early America: An Informal Gold Standard
When the United States first gained its independence, they had a lot to take care of. One of the most pressing issues on the docket was their currency. Until the country became officially independent, we used an informal currency called the Continental Dollar.
In fact, some Americans actually became vastly wealthy by accepting the Continental Dollar long before the U.S. government won the war and was able to make the currency valuable.
After our victory against Britain, the newfound U.S. government needed to find a way to make their currency valuable. The result was a pseudo gold standard. Historians believe that the earliest days of the United States Dollar were characterized by a combination of gold and silver standards.
In 1834, the United States functionally switched to a full gold standard. This system continued until 1900, when the government officially began the U.S. gold standard following a groundbreaking piece of legislation.
1900: The Gold Standard Officially Begins
In 1900, the U.S. government decided the path for their currency. They would follow in an age-old tradition of backing their currency by actual gold bullion. The United States had generally followed a kind of gold standard in the 1800s, but it wasn’t until 1900 when they officially adopted the gold standard to give their currency consistent, intrinsic value.
This decision happened in 1900 with the passage of the Gold Standard Act. At this point, it was legal to redeem United States fiat currency notes for actual gold. The government also regulated the value of gold bullion, pegging it to $20.67 per troy ounce.
This system persisted for quite a long time, until the value of gold began to increase to untenable levels in 1933.
1933: The Beginning of the End For the Gold Standard
1933 was the beginning of the end for the gold standard. President Roosevelt mandated that every person holding gold coins and certificates needed to hand in those assets in exchange for other fiat currencies.
When did the Gold Standard End?
This wasn’t exactly the end of the gold standard. From 1933 until 1971, the U.S. remained on an unofficial gold standard. While the laws had swiftly changed to begin the transition away from a gold standard, relatively steady gold prices meant that our national currency was still generally pegged to the value of gold bullion.
Finally, Richard Nixon cut the United States’ ties to the gold standard. This choice was part of a larger set of monetary policy changes under the Nixon administration. These days, the package of legislation is known as the “Nixon Shock.” Let’s take a closer look at what happened to the gold standard in 1971.
1971: The True End of the Gold Standard
In 1971, the American economy was in a tough situation. Unemployment rates were quickly rising, and inflation had become a significant problem. To combat these issues, President Nixon rolled out a long list of reforms that would fundamentally change the course of both the U.S. economy and the global gold bullion market.
Most importantly, Nixon officially took the United States off the gold standard in 1971. For gold investors, this wasn’t entirely a bad thing. The value of gold has risen significantly in the decades after the U.S. government stopped regulating gold prices.
But for our currency, the jury is still out as to whether or not the gold standard was actually a good thing. When Nixon took us off of the gold standard, the United States Dollar was no longer pegged directly to an intrinsically valuable, physical asset like gold.
What Was the Nixon Shock?
For economists and history buffs, the end of the gold standard was just the beginning of a series of radical reforms introduced during ‘Nixon Shock.’ We won’t get into all of these economic changes here, but you should know that Nixon fundamentally altered the U.S. – and global – economy rapidly with his series of reforms.
For our purposes, Nixon’s choices meant the official end of the gold standard in the United States. In other words, Nixon ended the gold standard in 1971. While he was motivated by a troubling economic situation in the USA, many investors believe the collapse of the gold standard to be one of the worst choices the government has ever made.
Is the Gold Standard Dead?
Surprisingly, the gold standard isn’t completely dead yet. It is true that Nixon ended the gold standard officially in 1971, a number of popular movements have attempted to bring back at least some kind of gold standard in the United States.
What happened to the gold standard? When Nixon took the United States Dollar off of the gold standard in 1971, a number of popular political movements began to advocate that we once again adopt the classic system of economics.
Below, we’ll talk about the modem movement for the gold standard. As you may have guessed, this is a contentious issue among investors – and the general population. It’s easy to imagine why the political-economic debate rages even to this day. After all, some gold stackers believe that traditional fiat currencies aren’t valuable unless they’re actually pegged in value to a tangible, intrinsically valuable commodity like gold.
Modern Political Movements Advocate for the Gold Standard
Over the past few decades, a number of political campaigns have called on the United States to reintroduce a gold standard to our currency system. These movements have never been particularly effective, although states like Utah have taken steps to put a pseudo gold standard into place within their own borders.
It’s tough to discuss the popularity of the gold standard movement without addressing its popularity among voters.
Do People Support a Gold Standard?
One poll conducted in 2012 found that around 29% of Republican primary voters “strongly supported” the gold standard. Additionally, around 21 percent of polled voters were “somewhat favorable” to the idea. In total, this suggests that an average of 50% of Republicans support some sort of gold standard in the United States.
Of course, this is an old poll and doesn’t reflect anyone except for Republican primary voters during that particular year. However, it does suggest that at least some American voters do back a return to the classic gold standard.
The movement comes up every few election cycles, especially among Republican candidates. But with the exception of a few outlier states like Utah, actual legislation backing a gold standard has been few and far between.
Goldbacks: Bringing the Gold Standard Back
What happened to the gold standard in the United States? While we haven’t seen an actual gold standard pass through legislative bodies, Utah got close with their 2011 Utah Legal Tender Act. This legislation set the groundwork for gold and silver being accepted as actual currency within the state.
Utah didn’t successfully make gold and silver legal tender, but they did help to bring us one of the most popular gold products on the market: the Goldback.
Goldbacks are a family of currencies that contain actual gold bullion. These beautiful gold products can be used at hundreds of businesses across the Western United States, and they’ve also become a popular investment option for collectors and gold stackers.
Final Thoughts: What Happened to the Gold Standard?
So what happened to the gold standard? Until 1933, the U.S. operated on a pseudo gold standard. But when Nixon rolled out a number of new policies to respond to a declining U.S. economy, he officially ended the gold standard in the United States.
Still, movements all over the country are trying to return to a currency backed by gold bullion. Goldbacks are one good example; these fascinating golden notes are minted with real gold and might be usable tender in some parts of the country.
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About The Author
Michael Roets is a writer and journalist for Hero Bullion. His work explores precious metals news, guides, and commentary.