The gold standard was one of the greatest developments in society’s financial history. It met its unfortunate demise following the Great Depression and has never been reinstated since. Given the current financial turmoil, that situation may come to change sooner rather than later.
Introducing the Gold Standard
Throughout history, gold has been a very dominant form of value and money. Hundreds of years B.C., people acknowledged the potential of gold. Not just as a metal, but also as a way to exchange value on an international scale.
Back in that period, it was a lot more straightforward to come by gold. It had to be dug up from the earth, but gold deposits were found much closer to the surface than they are today. This is what made it both accessible and popular. eventually making it into a material used for coins and bars.
The official introduction of the gold standard took much longer, however. In Europe, it took until the year 1870 before anyone even considered embracing the gold standard as a monetary philosophy. By adopting this new standard, the government in Europe would redeem paper money for its value in gold without asking questions.
This approach introduced numerous benefits. First of all, it was no longer required to conduct transactions with heavy gold bullion or coins. Paper currency could be used much easier, and it offered a guaranteed value tied to gold at all times. This version of the fiat currency system worked wonders, as it also prevented any form of cheating.
In the United States, it took much longer to embrace the gold standard. In fact, it wasn’t introduced until the Gold Standard Act of 1900. The model was the same/ gold was established as the only metal for redeeming paper currency.
Going Downhill From 1913
Despite embracing the gold standard in 1900, it didn’t take long for the US Congress to come up with a system they thought better. In 1913, the Federal Reserve was created to stabilize gold and currency values in the United States. A noble approach at first, but it is the beginning of the end for the gold standard.
With the help of the Federal Reserve, it became possible to suspend the gold standard during World War I. Instead, governments began printing money en masse to pay for military expenses. Over a hundred years ago, helicopter money was first introduced on a large scale. It has never disappeared since.
Following the war, things did not return to normal entirely. Countries figured that tying their currency to gold would prove harmful. More specifically, it would prevent them from printing unlimited amounts of money whenever they felt like it.
Eventually, most regions settled on a modified gold standard. although it was a temporary measure first and foremost. Deflation caused by the gold exchange standard, combined with high unemployment figures, ensured that the international gold standard would eventually be abolished by 1933.
The Great Depression
Considering how the gold standard was on its final legs by the time the Great Depression hit, it was a matter of time until it was abandoned completely. It is worth noting that the Great Depression triggered a rising gold price, as people wanted to get out of stocks and domestic currencies. Banks eventually started failing as consumers pulled out their money rapidly.
With the US gold reserves on the verge of being depleted, President Franklin D. Roosevelt closed the banks altogether. Once banks reopened a week later, all of their gold reserves were moved to the Federal Reserve, preventing banks from redeeming dollars for gold.
Further hoarding of gold was dissuaded and prohibited by FDR. Eventually, the gold reserves were moved to Fort Knox. A year later, the Gold Reserve Act ensured no one could privately own gold without a license.