What Is the Origin of the Gold Standard in the U.S.?

The gold standard is a guarantee by a government that their currency is backed by gold. This means that the government's currency can be redeemed for an equal amount of gold at any time. In the past, governments would place their currencies on the gold standard in order to prevent fluctuations of currency exchange rates and to guarantee that the government wouldn't print more money than it had in its treasury. The United States was on the gold standard for 50 years, but eventually went off of it out of economic necessity.

History

International trade increased dramatically during the Industrial Revolution of the mid-19th century. It became obvious that the old silver standard for currency was not adequate for world commerce. Silver prices fluctuated too much because it was a fairly common commodity. In 1821, Great Britain became the first major industrial nation to go on the gold standard. The United States followed suit in 1873 so that it could compete in international trade.

Legislation

The law that placed the United States on the gold standard was the Coinage Act of 1873. It was a very controversial piece of legislation. Politicians defined themselves as backers of the gold standard or the silver standard. In general Republicans favored a gold standard while the Democrats favored a silver standard; however, there was quite a bit of dissension in both parties. The primary issue in the election of 1896 was the gold standard. William McKinley, who backed the gold standard, won a convincing victory. This guaranteed the continuing use of the gold standard in the United States for several more decades.

Evolution

The gold standard worked fairly well from the 19th century until World War I. World governments worked together to trade gold on an equal footing, and the world supply of gold was adequate to accommodate the world economy at the time. However, World War I threw world commerce into disarray. Nations at war needed to raise money to finance the war effort. A strict adherence to the gold standard made this difficult. Several governments started spending more money than they had in gold reserves. There simply wasn't enough gold around to back the amount of money needed for commerce. This marked the beginning of the end of the gold standard.

Demise

The Great Depression that followed World War I made it even more difficult for nations to stick to the gold standard. People lost faith in the dollar and rushed to banks to redeem them for gold. This run on the banks forced many to close their doors, which led to panic. President Franklin D. Roosevelt took the United States off the gold standard in 1933. The Gold Reserve Act of 1934 allowed a gold bullion standard to be used for world trade, but the days of a gold-backed dollar were over.

New Gold Standard

There are advocates for placing the dollar on a new gold standard. Many, like presidential candidate Ron Paul, argue that the U.S. dollar has been used as a reserve currency throughout the world just like gold was a century ago. However, the power of the dollar has diminished significantly in recent years. Advocates of a new gold standard are concerned about what would happen to the world economy if the U.S. dollar sinks further. They argue that gold would once again provide stability. Very few lawmakers around the world support their view, so it is unlikely that it would happen anytime soon.