US Dollar in Decline: Part II - The Gold Standard

Michael Cerkas's picture

Although the famous Gold Rush of 1849 in California brought gold to the forefront of attention in the United States, gold has been globally used as the basis for monetary systems, dating back to the Egyptian era BC.

Gold has long been considered valuable; so valuable that it has been associated with economics and used as a standard to measure wealth as a function of its weight and purity. The most common forms of gold have been bullion and coinage, although paper currency called ‘gold certificates’ were used for a period of years as well.

In the last century, around the mid-1800’s, countries began accepting and using gold as a standard physical asset to conduct financial transactions as world trade grew.

The formality of gold as a standard occurred with the passage of the Gold Standards Act in 1900. In principle, it basically established gold as the only standard for redeeming paper money, surpassing bimetalism (silver and gold), and was signed into law by President William McKinley. The originally fixed value of one dollar was set at 25.8 grains of 90% pure gold.

Notably, the Federal Reserve Act was enacted by Congress in 1913. It specified the creation of the Federal Reserve System, a central banking system that was authorized by the United States Government to issue legal tender. It was signed into law by President Woodrow Wilson. The Federal Reserve Act required the United States to retain a minimum of 40% of the value of all Federal Reserve Notes in gold bullion.

Using World War I as a point on a timescale, most countries had already adopted the use of the gold standard. Post World War I, however, impacted by the tremendous cost of the war, many nations abandoned or suspended use of the gold standard, allowing them to print paper money not backed by gold as a means to pay for their debts incurred during World War I.

The price of gold as a physical asset held steady in the range of $20-21 for 100 years from 1833 to 1933. Then, as a result of the Great Depression, in 1933, President Franklin D Roosevelt signed the Emergency Banking Bill. As specified in the law, personal gold possession became illegal.

Subsequently, the Gold Reserve Act of 1934 devalued the dollar by 41% (i.e. increased gold price by 69%) and gold was re-valued from $20.67 to $35 per ounce. Gold Certificates became Irredeemable. The Gold Reserve Act gave the U.S. Government permanent title to all monetary gold and halted the minting of all gold coins.

US Dollar and Gold Go Separate Ways
The price of gold continued to remain stable until the early 1970’s when the energy (oil) crisis spurred high inflation and prompted President Richard Nixon to formally curtail the use of the Gold Standard by the United States in 1973. On December 31, 1974, the United States Government ended its ban on individual ownership of gold.

Once decoupled from the US dollar, gold prices soared from $79 (per ounce) in 1973 to $676 in 1980, just seven years later.

The disassociation of the US dollar with gold transformed the economy of the United States from stability and controlled growth to runaway periods of inflation and chronic devaluation of the dollar. Since the decision to abandon the gold standard, the U.S. economy has been based primarily on GNP (Gross National Product), consumer confidence and the United States Treasury ratings, versus the physical gold asset.

Fast forward to the mid 2000’s, where the gold asset disconnect led to increasingly excessive government spending, and in turn, an uncontrollable national debt, causing the Federal Government to excessively print more money (federal reserve notes). The logic is to intentionally devalue the dollar to make it a more attractive investment by foreign countries and other outsiders.

Gold Price Historical Chart

The price of gold today (May 16, 2011) is $1,490 per ounce.

Return to HULIQ to read:
The US Dollar in Decline: Part I – A Brief History Lesson
The US Dollar in Decline: Part III – Global Reserve Currency

Image credit: Wikipedia

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