History Of Gold Standard
Imagine those days when barter system existed in the world. People would exchange goods with one another when they wanted things that they could not get from nature or their surroundings. Slowly, as civilizations progressed, more stress was given to precious metals and stones. One of the precious metals that has fascinated mankind for centuries is gold. Its golden color, sheen and rarity make it the most coveted metal that both people and governments around the world want to own. |
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Today, the monetary system in the United States consists of paper money that has the full backing of the federal government. This currency is not dependent on gold. However, this was not the case a few decades ago. In fact, even today, there are many people who support the gold standard where the currency was valued in and backed by gold. The supporters claim that the gold standard gave the country a lot of economic benefits. In order to understand why gold standard was used in the United States, it is necessary to get some inkling about the history of gold standard.
The country started out with a bimetallic standard wherein the dollar was valued and backed by gold as well as silver. Both metals were valued against one another at a ratio of 15:1. However, the world markets did not follow the same value and ration. They used a ration of 15.5:1. As a result, most gold in the United States left the country, and silver was made into the normal standard. Then, in the year 1834, the value of gold against the dollar was reduced to 16:1. This caused gold to become the standard, while silver was sent abroad. Also, with more gold being discovered, the value of gold began decreasing.
When the Civil War took place, the government minted paper money that could not be exchanged for gold or silver. As a result, the country was ushered into the paper currency system. However, in 1879, the United States moved back to the metallic standard, but this time the government decided to use just one metal and this metal was gold. While there were efforts made to also have the silver standard, it was finally rejected and the government decided to stick with the gold standard.
During the gold standard, the Treasury circulated paper money, which was not the legal tender. However, it could be redeemed for gold. To facilitate this, the government created a network of national bank in the year 1863 and then went on to form the Federal Reserve in 1913 to ensure that the redemption would be honored. During the gold standard, any imports were paid in gold based on the dollar value. It was always in the interest of the country to devalue the dollar against the gold.
However, the gold standard came to an end in the year 1933 when the government stopped the conversion of paper currency into gold and all the private stocks of gold were nationalized. But, the gold standard was still used for international transactions. But soon the government realized that it would not be feasible to continue with the gold standard and hence, even for international transactions, the gold standard was no longer used. This happened in 1971.
It is interesting to note that most countries had bimetallic standard in the 19th century. And, it was Great Britain that was instrumental in setting up the gold standard in the year 1816. This prompted out European countries to follow suit and in 1873, the US also decided to adopt the gold standard. However, it became impossible to maintain the gold standard once the First World War broke out, as the demand for gold was more than the supply. However, once the war finished, the standard was slowly restored, but it fell apart during the Great Depression, in 1929. This prompted the US to give up the gold standard in 1933 and finally the country took up the gold bullion in the year 1934 after the passage of the Gold Reserve Act. This was used just for international trade and transactions.
Once the Second World War came to an end, it became difficult for countries to sustain the gold standard as the official price of the gold was set at 35 US dollars. As gold's value continued to increase due to scarcity, many countries were unable to maintain the gold standard. And, finally in the year 1971, the US decided not to allow redemption of dollars for gold. This officially brought the gold standard to a close and soon many other countries followed suit. Hence, the gold standard that was used for buying and selling of goods at international level was history.
This is the history of gold standard and many people want this standard to return with the country facing economic hardship. They opine that the gold standard will be beneficial for the economy and help the country tide over this phase without facing too may repercussions.
More Articles :
Full Text Reports: Brief History of the Gold Standard in the United States
http://fulltextreports.com/2011/07/19/crs-brief-history-of-the-gold-standard-in-the-united-states/
How Stuff Works: Gold Standard
http://history.howstuffworks.com/american-history/gold-standard.htm
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