This article focuses on the gold standard. It provides a description and analysis of the pre-World War I gold standard and the post-World War I gold exchange standard. A historical overview of the United States' involvement in the international gold standard will be explored. The United States' current flat monetary system is discussed. The differences between fiat currency and gold currency are addressed. The relationship between the gold standard and exchange rate regimes is also described.
Keywords Bretton Woods; Business Cycle; Deficit; Depression; Economic Contraction; Economic Expansion; Exchange Rate Regimes; Federal Government; Fiat Currency; Fiscal Policy; Flat Monetary System; Gold Currency; Gold Exchange Standard; Gold Standard; Inflation; Monetary Policy
International Business: Gold Standard
Currency, which refers to a medium that can be exchanged for goods and services, facilitates economic activities such as trade, accumulation of wealth, and purchase of goods and services. Two types of currencies predominated throughout the nineteenth and twentieth century: Fiat currencies and gold currencies.
- Fiat currency refers to a currency that serves as legal tender but is not redeemable for a specific commodity.
- Gold currency refers to a currency that is redeemable for a specific amount of gold.
Currencies linked to the price of gold characterized the global currency system throughout much of the nineteenth and twentieth centuries. The gold standard, which is no longer in use, was a complete, global currency system in which national currencies were redeemable for their value in gold. The gold standard emerged in England in 1821. England was the first country to formally adopt a gold standard as the foundation of their national currency. Germany adopted the gold standard in 1871. In the United States, the gold standard, which was used off and on throughout the nineteenth century, was not formally adopted until 1900 with the passage of the Gold Standard Act.
Metallic Currency Standards
The gold standard is a metallic currency standard. In a metallic currency standard, governments establish the value of their national currency in relation the weight of a metal such as gold or silver. Citizens and nations do not always agree about which metal should be used as a metallic currency standard. In the United States, throughout the nineteenth century, stakeholders debated about the proper place of gold and silver as the economy's currency standard. Governments using the gold standard, or any metallic currency standard, constantly monitored and controlled the weight of metal used in the currency to ensure that the currency was not worth more as melted down bullion than as money in circulation. In the United States, throughout much of the nineteenth century, Congress defined the gold dollar as 24.74 grains of pure gold.
The following conditions are necessary for a metallic standard to operate effectively (Timberlake, 2007):
- The supply of common money that banks and individuals generate must be related to the quantity of monetary gold in government accounts
- Market prices must be sensitive to changes in the quantity of money in circulation
- Gold must be allowed to flow freely throughout the economy.
There are three different types of gold standards associated with different goals, objectives, and periods in history:
- The traditional or fixed global gold standard, used from the early nineteenth century to 1914, was based on the premise that currency was always redeemable for its equivalent value in gold;
- The gold-bullion standard, used in Great Britain from 1925 to 1931, operated with a set quantity of gold in circulation;
- The gold-exchange standard, used from 1934-1971, operated under a scheme in which national currencies are convertible into the currency of a country tied to the gold standard.
The following section provides a description and analysis of the pre World War I gold standard and the post World War I gold-exchange standard. This section serves as a foundation for later discussion on the connection between the gold standard and exchange rate regimes.
The United States
The history of the U.S. economy is full of economic expansion and economic contraction. Following the American Revolution, the individual economies of the states were faltering, paper money had little value, and there was conflict between borrowers and lenders. The original thirteen states came together to draft the U.S. Constitution, in part, to stabilize and strengthen the U.S. economy. The U.S. Constitution established a bimetallic monetary standard for the United States. The U.S. Constitution gives the federal government the power to coin money, regulate the value, and fix the standards of weights and measures. The U.S. Constitution prohibits states from coining money, making bills of credit, or making any thing but gold and silver coin legal for the payment of debts. The following timeline illustrates the evolution of the gold standard in the United States.
- 1792: Congress legalized gold and silver dollar coins.
- 1834: Congress changed the amount of gold in a gold dollar coin.
- 1853: Congress reduced the weight of gold and silver coins so that the coins would be worth more as money than bullion.
- 1862: Congress revoked the operational gold standard.
- 1863: Congress passed the National Currency Act that created a national banking system and the National Banking Act.
- 1873: Congress temporarily omitted the silver dollar from the list of authorized coins to be minted by the U.S. Mint.
- 1899: Congress passed the Gold Standard Act that established the gold dollar as the standard unit of value over silver.
- 1913: Congress passed the Federal Reserve Act that established 12 regional Federal Reserve banks.
- 1914: World War I began and the global gold standard faltered.
- 1929: The U.S. stock market crashed, the Great Depression begins, and the gold standard collapsed.
- 1933: President Roosevelt made gold export, without government license or permit, illegal and outlawed significant private gold ownership.
- 1945: The Bretton Woods currency system, known as the gold-exchange standard, was established.
- 1971: President Nixon ended the gold-exchange standard.
The Gold Standard During WWI
Nations embraced the gold standard as a means of facilitating capital mobility, trade, low inflation levels, and economic stability. The gold standard fell out of favor during World War I due to the hostility between nations and the unwillingness of multiple nations to engage in acts of economic cooperation. Supplies of money and gold were relatively stable throughout the gold standard years. The system of the gold standard gave national governments little freedom to develop monetary policy and prevented national treasuries from quickly increasing the amounts of money circulating in the economy. For example, the gold standard limited the U.S. Federal Reserve's ability to increase the money supply. As a result, national governments, under the gold standard, were limited in their ability to respond to changing economic and social situations in a country through the use of exchange rate policies. Monetary shocks and recessions were common under the gold standard. The issue of privatization of the economy was also an issue under the gold standard. Individuals could potentially influence the economy by purchasing significant amounts of gold. The gold standard established and controlled the economic relationship between the government and the people, limited the government's control in the economy by limiting the government's ability to make new monetary policy, and was considered a self-regulating entity of the economy.
The Gold Standard Following WWI
Following World War I, the gold...
(The entire section is 3573 words.)