In this post, I wanted to touch upon an interesting topic in the world of finance: the gold standard, its use in the United States, and how the system ended in the 1970s.
In simple terms, the gold standard is a system of monetary policy where a unit of currency is tied to a set amount of gold. This was often used to guarantee the value of a currency and promote stability in the monetary system. It became prominent in the 19th century as the British Empire became the world’s foremost financial power while using the system. Other countries started to adopt the gold standard, such as France, the Russian Empire, and the U.S, as it was beneficial to adopt the system when trading with other countries on the gold standard. However, the system became unpopular in the late 1920’s as it was viewed as prolonging the Great Depression by limiting the supply of money, and President Franklin Roosvelt abandoned the system in the 1930’s.
After World War II, the US, Canada, Australia, Western Europe, and Japan created the Bretton Woods system that regulated international finance. Part of this was the reliance of the US Dollar on the gold standard, with an exchange rate of 35 dollars for one ounce of gold. Additionally, many currencies of other nations were set to the dollar.
At the end of the war, the U.S had most of the world’s monetary gold supply. However, as time went on, more countries came into possession of gold, usually by trading with the U.S and reconstructing in the postwar period. In the 1960’s and 70’s, high inflation, coupled with the fact that the U.S no longer had much gold left, made the U.S government wary that foreign nations would start to redeem much of their currency for gold. As a result, President Nixon disallowed the conversion of the dollar into gold, effectively ending Bretton Woods and the gold standard. Since then, the U.S, as well as much of the world, relies on the fiat system, where money only has value because it is backed by the government and is valued by producers and consumers.
As for my opinion on this system, I think it is good in places where stability is needed and money needs legitimacy, but ultimately restricts economic growth by limiting the money supply and limiting the ability of central banks to help the economy in recessions. In the future, I don’t really see a return to the gold standard in many countries.
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