The History of Gold Pricing in US Dollars
Once upon a time, the United States did not experience significant inflation. It had a reliable bimetallic currency backed by silver and defined in terms of gold. Today, the price of gold in dollars fluctuates constantly, but the history of gold pricing in U.S. dollars is fairly stable. According to the Constitution, only Congress has the authority to make money and to define its value. It did just that in 1792. Since then, however, massive changes to the dollar and its relationship to gold have undermined the value of U.S. currency by an alarming proportion. What began with relatively minor fits and starts eventually became a complete decoupling of the dollar from gold, and the inflation associated with modern financial systems quickly began to erode the purchasing power of U.S. currency.
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Coinage Act of 1792
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The U.S. dollar was created by one of the first acts of the new national Congress, the Coinage Act of 1792. In this seminal legislation, a dollar was defined as 27 grams of silver, or one-tenth of an eagle. An eagle was defined as 17 grams of gold, and equal to $10 dollars. There are 31.1 grams in a troy ounce. This means the single ounce of gold it took $937 to buy on July 17, 2009, would have cost only about $19.44 in 1792. The gold itself has not significantly changed in value. Rather, the dollar has depreciated by over 48,000 percent. Put another way, a 2009 dollar is only worth about two cents in 1792 terms.
1830s
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With the exception of times of war, the U.S. dollar remained fairly stable for nearly a hundred years after the Coinage Act. In 1834, the dollar experienced its first official devaluation, a minor change that saw it reset to $20.67 per ounce. Changes in the relative value of gold and silver precipitated by massive discoveries of silver in South America led to the change. As silver became more plentiful, its relative value declined, and savvy investors traded in their silver-backed paper notes for gold. To prevent a run on gold, the U.S. was forced to adjust the terms of its bimetallic currency. The entire decade of the 1830s saw a technological revolution in minting that led to a redesign of U.S. coinage. The new Liberty Head design engraved by Christian Gobrecht would be used for $10 gold eagles into the 20th century.
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Gold Reserve Act of 1934
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Periods of war and adversity always test national currencies because the necessity of deficit spending outweighs considerations of inflation and devaluation. It wasn't until 1934, in the depth of the Great Depression and on the precipice of Wold War II (WW II), that the U.S. again revisited the value of its currency relative to gold. The Gold Reserve Act made private ownership of gold bullion a federal offense. All the gold bullion (everything but legal tender coins) in the country was confiscated. Even so, massive deficit spending forced the value of a dollar to slide to $35 per ounce, a massive 66 percent devaluation. But, this ability to print significantly more dollars helped fund the New Deal and, eventually, the massive war effort that contributed to ending the Depression.
Bretton Woods
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In the aftermath of WWII, the 44 Allied nations gathered at Bretton Woods, New Hampshire, to design a global currency system. The U.S., which had become the richest and most powerful nation in the world after the war, would lend its dollar as the world's reserve currency. All other nations were tasked with managing their money supply so as to maintain a fixed exchange rate with the dollar, which would continue to be redeemable at the rate of $35 per ounce, the so-called gold standard. Adopted in 1946, Bretton Woods was the world's first ever attempt at an international monetary standard. It would, however, be short-lived.
End of the Gold Standard
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Unfortunately, the massive spending made possible by the devaluation of 1934 did not stop after the war. The United States continued to run massive budget deficits, building up a Cold War military, and funding all sorts of international adventures. By the mid-sixties, maintaining the $35 per ounce peg may have seemed possible. By the early seventies it clearly was not. The U.S., which held more than half the world's gold after WWII, had seen its reserves dwindle to 22 percent, as countries traded rapidly depreciating dollars for reliable gold bullion. In 1971, the Group of Ten nations agreed to devalue the dollar again, fixing it at $38 per ounce, or roughly half its original 1792 value. But even this system was not sustainable, even though President Nixon had ended the practice of redeeming dollars into gold. In 1973 the dollar was reset at $44 per ounce. The following year the U.S. abandoned the gold standard altogether, and gold has floated freely ever since.
Floating Gold
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Since the collapse of the Bretton Woods system and the end of the gold standard, the U.S. dollar has not had any inherent value. Yet, because of its long history with gold, the floating gold price can be used as a relative measure. In 1980, amid massive spending and inflation, the U.S. dollar hit $850 per ounce of gold. Through tighter monetary controls and economic growth, the dollar rebounded and traded as low as $300 per ounce by the year 2000. Since the massive deficit spending and easy money policy that followed in the wake of the 9/11 attacks, however, gold again has soared. For the first time ever, it broached the $1,000 level in 2007.
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- Photo Credit U.S. Department of the Treasury
