US and Gold Standard?

Why did the US move off of the Gold Standard? And should it go back to the Gold Standard?
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Wow some very good answers!

Ricks and Santa's Lil Helper gave great answers. They are correct in that gold acted as a guardian against rampant money printing by the gov't. As you print money, you drive inflation. I'm not going to go into why they came off the gold standard because the other posters gave EXCELLENT answers.

Should we go back to the gold standard? No. Now, don't get me wrong, I am all for monetary/fiscal responsibility and believe in not rampantly/arbitrarily inflating the money supply, the problem is that if you went back to the gold standard, you severly contract the money supply and grind the economy to a halt as there is not enough gold to cover reserves needed. In the last 4000 years of human history, only 140,000 tonnes of gold have been mined. At current prices, that's only about $3 trillion - not enough to foster adequete world trade.

An asset backed currency is meant to be a safeguard against rampant money creation, but what commodity is there enough of to adquetely supply enough currency to foster world trade? I don't think there is. But you don't necessarily need an asset backed currency to thrive and prosper and keep inflation in check. In the colonial days of America, prior to the American Revolution, the colonies issued their own currency, Colonial Scrip, that was pure fiat and the colonies did very well and prospered and became wealthy. The secret to their success with a pure fiat currency was they exercised very strict restaint and only printed enough money to foster trade and commerce and only added enough funds to compensate for population growth. They colonies did very well and grew very wealthy until the crown go ahold of the news and made it mandatory for the colonies to pay their taxes in gold. Since gold was very scarce, the colonies very quickly fell into hard times and poverty. As a matter of fact, Ben Franklin in his biography said that the colonies would have easily accepted a tax on tea, but it was the fact that they could not regain control of the issue of their currency from the Crown that ultimately lead to the American Revolution.

So going back to an asset backed currency is not necessarily the best answer. I feel that having a fiat currency is fine as long as the gov't exercises very strict and disciplined control over money creation. That's highly unlikely as gov't love to spend more than they have.

The gold standard triggered and it adherence worsened the Great Depression. Prior to the Depression and prior to the act creating the Federal Reserve System, banks transported gold and silver back and forth and across national boundaries. There is an excellent book on the disruptive effects of gold on markets called "Jacksonian Economics," covering the period of Jackson's presidency.

This worked reasonably well, but banks would periodically run out of specie in a region or even nationwide simultaneously. This would create "banking suspensions," where banks refused to honor their commitments en masse. If one bank did this it would be forced into liquidation, but if every bank did this you cannot do anything. In the 1830's rates hit 24% for short term borrowing because the nation ran out of gold suddenly and could not meet its trans-Atlantic obligations.

Gold and silver moved substantially across national borders. This is expensive and risky. All these sunken treasure ships are a testament to this.

Prior to the Federal Reserve, Suffolk Bank in New England served as New England's reserve bank. It worked remarkably well, better in fact than the Federal Reserve has worked.

The Federal Reserve Act was designed to take the successes of Suffolk Bank national. It did not work. No one knew how to manage a central bank in the United States and lacked the information structure to do it.

Because of the belief system of the time, the Federal Reserve sought to defend the value of the dollar in terms of gold. This was thought by the people of the time to be the only moral solution. Knowing what something costs was a moral bedrock of the time.

World War I set the Great Depression in motion. It disrupted the relationships among the parties forcing suspension of the Gold Standard globally. When the war was over nations tried to restore the gold standard to its pre-WWI relationships. However those economic and contractual relationships were destroyed. Forcing the prior gold structure onto the new contracts ultimately put Hitler into power and put 33% of Americans out of work.

Initially Great Britain abandoned the gold standard, at the time it was considered a shameful thing, and largely recovered from the Depression. The depth and magnitude of the Depression depended upon when a nation abandoned the gold standard.

The gold standard was a problem because, unknown to the people of the time, gold acted as a communication channel for economic stresses. Gold creates rigid relationships even if flexible ones are needed. When a shock occurred anywhere in the world, it would propagate through the rest of the world at about the speed of the physical transfer of gold.

Further, there are hidden incentives to break the system and worsen shocks. Prior to the Depression, large gold inflows entered the United States. This would be highly inflationary, except the Federal Reserve neutralized the flows to keep American prices stable by literally locking the gold inflows in the vault.

This would be fine, except it reduced the amount of total gold available to the global banking system. Nations that were settling their obligations in gold with one another found that there was no gold to make payments in. They had to devalue their currency to meet obligations, skyrocketing local rates and destroying economies. However, in the 19th century, when this occurred gold would flow into these economies to get the high interest.

With the gold locked in the vaults of New York, there was no inflow to cover this. Ultimately there was a disastrous feedback effect that wiped out the American economy. Arguably it could have been prevented by superior management of the Federal Reserve, rather than the actual historical management, but the Gold Standard also forces each nation's central bank to be right every time. That is a tough standard to meet and guarantees eventual systemic failures.

No we should not go back. Current US money is backed by the loan portfolios of the people of the United States. This is far superior to gold because it is flexible. When the economy weakens the amount of credit is no longer dependent upon the physical amount of gold in the United States, but rather upon the economic system of the nation.

there are several reasons. The most obvious one that makes sense is: so that we could print as much money as we felt like without having to back it up.

Without having to have gold to back up the currency, then you have no reason to NOT print as much as you want or can. They can just say that we need $10 trillion bucks, & you just have to wait for the ink to dry rather than have it be guaranteed. That is what the gold standard did, it guaranteed the printed money was good & could be redeemed with something worth what its printed on. Now, every bill that is printed, is a debt that we must pay. Just imagine you have a checkbook you could write off & did not have to have anything in the bank to clear it?!

The gold standard, as an international monetary system, worked well until World War 1 interrupted trade patterns and ended the stability of exchange rates for currencies of major industrial countries. The USA returned to the gold standard during the 1920's , however these attempts failed, mainly due to the Great depression of 1929-32. In other words, country after country devalued its currency to stimulate its exports. Governments also resorted to exchange controls in an attempt to manipulate their net exports. Of course, with the onslaught of World War 2, hostile countries used foreign exchange controls to finance their war effort.

We needed to make more money that could be backed up by the US gold reserves. We cannot go back, we cannot buy enough gold to cover the guarantee.

Such an easy question to ask and so difficult to answer easily. Suffice it to say that this would be an excellent topic for a term paper.

Fortunately, Wikipedia has a very good synopsis of the historical evolution of the Gold standard and why some would like its return.

Good luck.

1) Because you cannot print unlimited amounts of money if your currency has to be backed by gold.
2) I don't know.

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