Realizing that pieces of paper had no intrinsic value (and the inflationary dangers this posed) the U.S. government eventually put the dollar on what is known as a gold standard. Essentially, this meant that every dollar in circulation was “backed” by a certain amount of gold that citizens could demand in exchange for their dollars. The gold standard became law in 1900 with the passage of the Gold Standard Act, which aimed to, “…define and fix the standard of value, to maintain the parity of all forms of money issued or coined by the United States, to refund the public debt, and for other purposes”, according to HistoryCentral.com. Specifically, the Act mandated that each dollar in circulation be valued at $20.67 per ounce of gold. Under such a system, the treasury could not simply print money on whim, but only when and if there were sufficient gold reserves. While the gold standard did indeed restrain inflation and promote sound monetary policy, it proved incapable of adapting to changing circumstances like wars and recessions. The standard was suspended twice during World War 1, for example, because European entities began owing by U.S. corporations in the form of gold. Thus began a massive gold outflow that continued unabated until the New York Stock Exchanged closed in 1914 and the gold standard was put on hold. To its credit, the U.S. restored the gold standard when the NYSE re-opened in December of that year, making the U.S. the only nation in the world to maintain its gold standard by that time.

It was not to last, however. When the Great Depression set in, currency speculators began demanding gold in exchange for their dollars en masse. While the Federal Reserve raised interest rates in an attempt to protect the gold standard, bank runs persisted throughout the early 1930’s. Finally, in 1933, President Franklin Delano Roosevelt suspended the standard and revoked gold as universal legal tender for debts. Interestingly, even this suspension was considered to be temporary at the time – it was only the growing chaos of the depression which kept the restoration of the gold standard permanently on the back burner in terms of political importance. Nevertheless, the U.S. dollar’s relationship to gold grew more and more tenuous over the years.

The Fiat Standard

(Noellium)

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