The Golden Rule: The gold standard and it's death
Once upon a time, you could reach into your wallet, pull out paper money known as a gold certificate and ask your bank teller to please redeem its value in gold. The advantage to such a system? It was said to avoid inflation.
The gold standard became the law in the United States on March 14, 1900 — 125 years ago Friday. It would drop the Gold Standard during the Great Depression in 1933.
What Was The Gold Standard?
A gold standard is a system in which the standard economic unit — in the case of we Americans, that’s the dollar — is based on a fixed quantity of gold.
When Alexander Hamilton set up the U.S. currency system in 1792, he had Congress use both silver and gold coins to set the value of the dollar. In the 1840s, gold was discovered in California, which lowered the price of gold relative to silver.
In the 1870s, gold was made the preferred standard. This caused difficulties for silver miners working the Comstock Lode to easily convert their silver into usable currency.
By the end of the century, the American money standard had become a polarizing political issue. Some — especially Republicans — preferred the gold standard and wished to make it stick.
Others — most prominently Democratic Congressman William Jennings Bryan — wanted increased coinage of silver at a rate of 16-to-1 against gold dollar coins. They called themselves the Free Silver movement.
Enter President McKinley
A law passed in 1890 required the U.S. government to buy millions of ounces of silver, which drove up its price, but the government reduced its production of silver coins. The result was a run on the treasury’s gold reserves in what became known as the Panic of 1893.
A cartoon in Harper’s Weekly showed McKinley straddling a rail on the “financial question” of silver and gold. Source: Wikimedia Commons
During Bryan’s run for president in 1896, he pressed hard for free silver. In what became known as his “Cross of Gold” speech, Bryan lambasted banking interests of the East for supporting the gold standard at the expense of workers and farmers. He compared the gold standard to the crown of thorns worn by Jesus at his crucifixion.
Later, a campaign poster showed him standing atop what's clearly a gold coin
His opponent, Republican William McKinley, hadn’t been vocal at first about his own monetary preference but eventually came out for gold, rather than for silver.
McKinley won that election, clearing the way for passage of the Gold Standard Act four years later. McKinley signed it into law on March 14, 1900.
The act fixed the value of a dollar at 25.8 grains of 90% pure gold — roughly $20.67 per ounce.
A Short LIfe For The Gold Standard
Most Western nations were using the gold standard by this time, but that came to a halt during World War I when the United Kingdom and other nations left the standard. The one-two punch of leaving the gold standard and financing their war efforts caused drastic inflation.
The U.S. did not leave the gold standard during World War I and most other nations had returned to it by 1927. The U.S. prospered throughout all this — until the start of the Great Depression.
Shortly after taking office, President Franklin D. Roosevelt issued a series of executive orders taking the U.S. off the gold standard, fixing the price of gold at $35 per ounce and forbidding the “hoarding” of gold by requiring U.S. citizens to turn in their privately-held gold.
Agreements set up after World War II restored foreign central banks’ ability to exchange U.S. dollars for gold at a fixed price.
However, as worldwide trade ballooned over the 1950s and 1960s, this placed a strain on the system. In 1971, President Richard Nixon announced the U.S. would no longer freely convert dollars at their official exchange rate.
In 1976, the definition of the U.S. dollar in terms of gold was removed from law. The gold standard was no more.
