History of the Gold Standard

The gold standard is an economic policy under which currency is backed by a reserve supply of gold. Britain was the first country to adopt the system, and the United States followed, as did most major Western economies. Weaknesses in the system were exposed during times of economic upheaval and war. As government spending and deficits rose, the United States abandoned the standard in 1971, signaling the end of the practice for most economies. Some have called for a return to the standard to end out-of-control spending by governments, but it appears unlikely.

What is the Gold Standard?

The gold standard is an economic principle in which a government supports its currency with gold. Under the standard, a nation's money is backed up with a gold reserve, and can be exchanged for it. For example, while America was on the gold standard, a dollar bill could, in theory, be exchanged for a dollar in gold, based on the value of gold at the time.

The First Gold Standard

England was the first country to institute the gold standard in 1717, based on the work of Sir Isaac Newton to convert England from a silver standard. In 1833, the Bank of England began issuing paper money that was legal tender, used instead of precious metal coins. In 1844, Britain's paper money was applied to the gold standard.

Keeping to the gold standard was always a problem. Economic downturns, as well as World Wars I and II, made it difficult for Britain to keep to the standard. The support of the United States of the gold standard kept it viable.

America Adopts The Gold Standard

America adopted the gold standard in 1834. It worked well for the United States, especially when the "Gold Rush" of the late 1800's added more gold to the U.S. supply. The "Gold Act" of 1900 made the Gold Standard law, but America left the gold standard briefly after worldwide inflation took hold after World War I. President Franklin Roosevelt reestablished the gold standard in 1933.

Leaving the Gold Standard

As nations and economies grew, those who were not on the gold standard began straining those economies that did. The worldwide financial crisis in the early twentieth century, including America's Great Depression, was in part, blamed on the gold standard. Legislation would make changes to gold standard law to keep it viable, including a law that prevented turning in paper currency for gold.

As deficit payments began dwindling the nation's gold supply, and spending on government programs and the Vietnam War grew, President Richard Nixon decided to drop the gold standard in 1971. The move effectively ended the use of the gold standard worldwide.

Support for the Return of the Gold Standard

A number of economists have called for the return to the gold standard, or at the very least, a similar standard. In recent years, runaway spending, large deficits, and the collapse of certain markets (such as the internet bubble and real estate after the sub-prime mortgage crisis) have caused wild stock market fluctuations, a falling U.S. dollar, and and the loss of savings and investments. Many speculate that a return to the gold standard would strengthen the U.S. dollar and the economy in general. Others argue that the United States could no longer operate on the gold standard, and would leave the economy open to manipulation.

Former chairman of the United States Federal Reserve Alan Greenspan supports returning to the gold standard as a way to curb deficit spending, especially by government. "The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."

While a return to the gold standard may be slim, as the world's economies change, the security of putting your financial faith in gold may once again be embraced.