Name: What Is a Gold Standard?
Uploaded: 2014-05-14T16:11:44.000Z
Duration: 4 min 25 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

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Why did the United States leave the gold standard? Basically, because the gold standard constrained

I get a lot of questions from students about the gold standard. For example, what is it?

And why don't we have one anymore? I will start by explaining what it is. Under a gold

standard, the monetary unit is defined as a certain amount of gold, like 1/20 of an

ounce, or 10 grams. In the era of the international gold standard, before World War I, the U.S.

dollar was defined as a little less than 1/20 of an ounce of gold. To be precise, one ounce

A silver standard follows the same idea. The British monetary unit, the pound sterling,

originally meant exactly that: one pound of sterling silver. A gold standard can operate

with or without government involvement in the minting of gold coins, the issuing of

gold-backed paper currency, and the provision of gold-backed checking accounts. Historically,

private mints and commercial banks were reliable providers of gold-denominated moneys.

Thanks to the banks, a gold standard doesn't mean that people have to carry around bags

of gold coins. Anyone who finds paper currency and checking accounts more convenient can

use those. But it does mean that if a person wants to redeem a bank's $20 bill or cash

its $20 check, the bank is obliged to give him a $20 gold coin. The obligation to redeem

for gold guarantees the gold value of all kinds of bank-issued money. And the purchasing

power of gold was historically very stable. By contrast, under today's unbacked, or fiat,

dollar standard, there is no value guarantee. If you take a $20 Federal Reserve note to

a bank, all you can get for it is other Federal Reserve notes. The experience with fiat moneys

in various countries has ranged from mild inflation to terrible inflation.

the federal government. The obligation to redeem in gold limited money printing at times

when the federal government, rightly or wrongly, thought more money printing would be a good

idea. The United States went off the gold standard in two major steps. First, in the

1930s, under President Franklin Roosevelt, the federal government broke its promise to

redeem Federal Reserve notes in coin for U.S. citizens.

Private ownership and use of gold coins were actually outlawed. Individuals and banks were

ordered to turn in their gold coins and bullion to the Federal Reserve. In the late 1960s

and early 1970s the Fed printed dollars rapidly. The falling purchasing power of the dollar

triggered redemptions by foreign central banks, and the U.S. government began running out

of gold. Rather than stop printing dollars, Nixon ended their redeemability in 1971. The

money printing then accelerated, culminating in double-digit inflation around 1980. By

contrast, inflation under the classical gold standard was never in double digits and averaged

only 0 to 1 percent per year over the long term.

A common objection to a gold or silver standard is that there can be random shocks to the

supply or demand curves for metal and that these will make the purchasing power of metallic

money unstable. But historically this was not much of a problem. For example, after

the major supply shock of the California gold rush of 1849, as the gold dispersed over the

entire world, the resulting inflation was less than 1.5 percent per year for about eight

years. Thereafter the price level leveled off and later gradually declined as the world

output of goods grew faster than the stock of gold. Under our current fiat standard,

the supply of money is up to the decisions of the Federal Open Market Committee. There

is no self-correcting market tendency to prevent the creation of too much money under that

system. The fate of the dollar rests with a handful of political appointees.

The practical question is under which system are the quantity and purchasing power of money

more stable. In other words, which system better limits inflation? The answer to that

question is clear from the historical record. Gold and silver standards have dramatically

outperformed fiat standards around the world in providing stable, low-inflation currency.