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The Gold Standard Throughout most of the 1800 's, the United States utilized a bimetallic system of money. Though it was focused on both gold and silver, it was essentially using a gold standard because very little silver was actually traded. A real gold standard came to fruition in 1900 after the passage of the Gold Standard Act. The gold standard was used from that time until it came to an end in 1933 when President Franklin D. Roosevelt outlawed private gold ownership, with the exception of jewelery and jewelery making. The Bretton Woods System was enacted in 1946, and it created a system of fixed exchange rates that allowed governments to sell their gold to the United States treasury at the price of $ 35 per ounce.
The Bretton Woods system was used until August 15, 1971, when President Richard Nixon ended trading of gold at the fixed price of $ 35 /ounce. At that point, for the first time in history, formal links between the major world currencies and real commodities were severed. The gold standard has not been utilized in any major economies since its end in 1971. To describe what the actual gold standard is, it is important to acknowledge that there are different versions of the theory. If the governing monetary authority holds enough gold to convert all circulating money, then this system is known as a 100 % reserve gold standard, or a full gold standard.
In some instances this version is referred to as the Gold Specie Standard to separate it from the other forms of gold standard that have existed at different times. Some believe there is no other form of Gold Standard other than the 100 % reserve Gold Specie Standard that was just described. This is because in a partial gold standard there is an existing amount of circulating paper that is not backed by gold, and it is therefore possible for monetary issuing authorities to attempt to use seignorage and possibly inflation, both of which the gold standard is supposed to prevent. Some modern advocates of supply-side economics contest that while gold is the accepted unit of account, then it is still a true gold standard. In a national gold standard system, gold coins are circulated as legal tender and all paper money is freely convertible into gold at a fixed rate. If paper money exchanges with gold at a floating rate, then that paper money is fiat money, and it will often devalue against specie.
This has particularly been the existing problem during wars when governments would issue paper currency that was not backed by specie. Examples of this problem in history include Greenbacks that were issued by the Union during the American Civil War, and paper marks that were issued by Austria during the Napoleonic Wars. Episodes like these ones have traditionally lead to calls to restore what was called "sound" money after the war, which would refer to a hard-currency monetary system. With an international gold-standard system, which can exist in the absence of any internal gold standard, gold or another currency that is convertible into gold at a fixed price is used as a way of making international payments.
Under such a system, when exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold from one country to another, large inflows or outflows occur until the rates return to the official level. International gold standards often limit which entities have the right to redeem currency for gold. During the use of the Bretton Woods system, these were called SDR's, which stood for Special Drawing Rights. The essential idea of the gold standard in all its theories is based on the belief or concept that inflation is caused by an increase in the quantity of existing money, and that uncertainty over the future purchasing power of money has a negative effect on business confidence, which then leads to reduced trade and capital investment.
The central focus of the gold standard is that removing uncertainty, friction between kinds of currency, and possible limitations in future trading partners will greatly benefit an economy, by expanding both the market for its own goods, the solidity of its credit, and also the markets from which its consumers can purchase goods. The benefits of enforcing fiscal and monetary discipline on the government are central to the benefits obtained by using the gold standard, and those that advocate the gold standard often believe that governments are almost entirely destructive of economic activity, and that a gold standard would reduce their ability to intervene in markets, and therefore will increase personal financial liberty as well as economic health. The actual affects of the gold standard are somewhat controversial. Though what actually happens depends greatly on outside variables, in theory new production of gold under the gold standard would add only a small fraction to accumulated stock, and because the authorities would guarantee free convertibility of gold into non gold money, the gold standard assures that the money supply and, hence, the price level would not vary very much over the long run. In reality, however, periodic surges in the world's gold stock, such as the gold discoveries the occurred in Australia and California around 1850, can cause price levels to be very unstable in the short run.
One advantage of the gold standard is the effect it would have on interest rates. They would keep rates low as well as constant, and which would help reduce current budget deficits. For all its advantages, the gold standard failed as an international monetary system. This is mainly due to the adjustment process between different economies.
The adjustment process could be very painful, particularly in the case of the deficit country. While that country's money stock automatically falls, aggregate demand would also fall. The result is not just simply deflation, but also a high unemployment rate. Overall, the deficit country could be pushed into a recession or depression by the gold standard. A related problem is one of instability; under the gold standard, gold is the ultimate bank reserve. A withdrawal of gold from the banking system could not only have severe restrictive effects on the economy but could also lead to a run on banks by those who wanted their gold before the bank ran out.
Overall, the gold standard in this form cannot work as an international system because of the detrimental effects it can have on some countries involved. Reference Campbell, Colin. Alternative Monetary Regimes. Baltimore: Johns Hopkins University Press, 1986. Ref, Jacques. The Age of Inflation.
New York: Garland Publishing, 1983. Weber, Christopher. Good as Gold. Berryville, Va. : George Edward Foundation, 1988.
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Research essay sample on Bretton Woods System Gold Standard
