Looking Back at the Gold Standard — a walk down not-so-fond memory lane
Hey everyone, this is article #2 and I’m going to be departing from the data structures and algorithms I talked about last time. There probably won’t be any real patterns to how I write…just going with whatever idea hits me.
In this piece, I thought I’d talk about the gold standard and basically how money works in the United States. Money is a tricky business — it’s supposed to represent the material value of something, but almost every nation has its own currency and the exchange rates change literally by the day. However, I’m not going to talk about international economics today; for now, let’s just take a look at the old Washington.
Here it is — Mr. Washington’s slightly disgruntled face sitting on top of a very unique paper covered in odd symbols, stamps, letters, and designs (again, topic for another day). Paper money has been in vogue in the United States since the late seventeenth century (before the United States existed), and it has gone through numerous trials and tribulations since. The ability to print Mr. Washington’s face was transferred from states to private entities to the federal government, and at least in the early days, they were backed by something that had more intrinsic value than a fancy piece of paper: gold.
Well, gold and silver, but it changed across the years and gold was much more famous. The U.S. began with a bimetallic standard for paper money but unofficially switched to just gold in 1834 (the official switch happened in 1900, when the U.S. government passed the Gold Standard Act and established gold as the only metal that could redeem paper currency). Each ounce of gold was worth $20.67, and this value remained fixed for many, many years. In 1848, the California Gold Rush vastly increased the amount of gold that the United States possessed, inflating prices across the nation. This was the major principle behind the world economy until the mid 1900s; the gold standard meant that international transactions could be standardized and that exchanges of heavy metals were no longer necessary. Paper money had real, guaranteed value, but this value changed (read: dropped) every single time a country gained more gold.
Tying the value of paper money to gold seemed smart, but had two major issues: massive fluctuations in value when the amount of gold changed, and limitations on the amount of money governments could use.
However, the era of the gold standard was, at a large scale, a prosperous one. The time period was marked by great growth in the world economy and extensive trade, but the Great Depression and the World Wars would bring this to an abrupt halt.
At the end of the 1920s, bank failures in the U.S. led to incredible deflation; prices hit all time lows, and the terrified American public preferred to hoard their gold rather than risk losing it in a bank. The spiraling economy needed to be stabilized with money, and increasing money supplies was impossible under the gold standard because money was tied to gold. So, many countries began leaving the gold standard and printing more money. The U.S. did not follow suit until two years later, a delay that many historians argue worsened the Depression greatly. Eventually, the Gold Reserve Act forced the American public to trade their gold in for cash, increasing American gold reserves, the price of gold, and the money supply. This was the beginning of the end of the gold standard and the exchange of cash and gold; as huge federal programs like the New Deal and the Great Society came into play, the money supply needed to become larger and larger, and the gold standard eventually became completely impractical.
So, what really is the legacy of the gold standard? What does it do, why do (or don’t) we need it today?
Today, the gold standard is just a memory, and the reasons the U.S. used to enforce it–low prices and deflation–have also faded into the past. Inflation is no longer a problem, but rather normalcy, and to fund increasingly complex programs, the government grows more and more careless with our overall money supply. President Roosevelt abolished the gold standard in 1933, and $1 in that year had the same purchasing power as over $20 today, a simple statistic that rather nicely sums up our inflation problem. While the government continues to inflate our national money supply (and with it our national debt), it is important to remember that the gold standard did have its own drawbacks. Government spending was really, really limited under the gold standard, and in scenarios like the recession of 2007–2008, the gold standard could have greatly worsened economic issues. Because we are able to freely manipulate the money supply, expensive programs like Social Security and Medicare are possible–if the dollar was tied to a raw material, there simply wouldn’t be enough money to run these programs, leading to terrible consequences for the non-elite in our nation.
Have any thoughts about the gold standard or an idea for my next article? Let me know at omgoswami101@gmail.com or follow me on Instagram or Twitter as I continue on my Medium journey. Thanks for reading!
