The Gold Standard Explained

In the era of rising government debt, it is worth understanding the history of the gold standard. I’m guessing some of you will be surprised by how the gold standard came and went over time.

A Brief History of the Gold Standard

The idea behind the gold standard is that there is a relationship between the amount of gold held by a country and the amount of paper currency in circulation. When the gold standard was operational, you could go to the bank and convert your paper currency into gold.

The first gold Standard was implemented in the United Kingdom in 1821. By the 1870s, most countries, including the United States, joined the gold standard.

During World War I, the gold standard was suspended because countries couldn’t maintain the relationship between gold and paper currency and pay for the war. In other words, the gold standard prevented countries from having enough monetary flexibility to pay for the debt caused by war.

After World War I, the world returned to a modified version of the gold standard. But the Great Depression soon created another situation where governments needed the flexibility to print money without regard for the amount of gold they held. By the end of 1937, no country remained on the gold standard.

Under the 1944 Bretton Woods agreement, countries agreed to set thee exchange value of all currencies in terms of gold. Since United States held the majority of gold reserves, most countries simply “pegged” the value of their currency to the value of the US dollar. This agreement essentially made the US dollar the world’s de facto currency.

In the early 1970s, the US economy was slumping and banks began redeeming their paper currency for gold. No longer able to meet the demand for gold, the Nixon administration permanently dropped all relationship between the amount of gold and the amount of paper currency in circulation and the government no longer redeemed paper currency for gold.

My Thoughts on the Gold Standard.

The gold standard failed as a workable idea because it doesn’t allow countries the ability to pay for what they value. Beginning in 1914, the gold standard was temporarily dropped because the world was at war. During the ’30s, the gold standard was again dismissed because governments needed to spend to keep people alive and provide work.

Today, politicians and the corporate media talk about deficits and debt like they are balancing a personal checkbook. As the history of the gold standard indicates, there is one big difference between the government of the United States and us–the government can simply create as much money as it needs. When it comes to funding war, providing the wealthy and corporations tax cuts, and propping up corporations, the government will create trillions of dollars without hesitation. When it comes to providing all Americans health care, a guaranteed job, free college, or even ensuring the health of our planet, politicians scream debt. The problem with the debt argument is the government could simply create enough money to pay off the entire debt tomorrow by having someone type on a computer keyboard. There are reasons why that may not be the best idea, but it’s worth knowing it is possible.

When politicians of both parties yell about the cost of doing something for us, remember there is no actual cost to government of doing anything. They are using cost to scare us into allowing them to do nothing for us. Meanwhile, they have empowered the Federal Reserve to create all kinds of money for Wall Street that isn’t subject to any Congressional debate.

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