Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Why the Gold Standard is Still Relevant

Commodities / Gold and Silver 2013 Jul 09, 2013 - 02:11 PM GMT

By: Money_Morning

Commodities

Tony Daltorio writes: This history of the gold standard explains why there's a growing group of advocates calling for its return...

President Herbert Hoover made a statement in 1933 that rang true for centuries and still rings true today for many: "We have gold because we cannot trust governments."


Hoover was talking about how governments have never been able to resist the temptation to inflate the amount of paper money issued until that paper money becomes nearly worthless. Gold, meanwhile, has been a reliable preserver of wealth for literally centuries.

Some nations have tried to meld the two together - gold and paper money - through the use of what is called the gold standard.

A gold standard is a monetary system where paper money is directly convertible into a fixed amount of gold. In other words, the value of paper money is backed by gold.

England was the first country to adopt such a monetary system in 1822 and its use soon spread around the world, including in the United States.

United States' Bi-Metallic System

Congress established the U.S. Mint in 1792, defining the value of the U.S. dollar in terms of a specific weight of gold and silver: a bi-metallic standard.

But when the United States devalued the dollar versus gold - from $19.39 per ounce to $20.67 an ounce - the U.S. shifted in effect to a gold standard system.

Under this system, it was not a requirement for banks to hold 100% of their deposit and paper money liabilities in gold or silver bullion. But banks were expected to hold enough bullion in their reserves in order to redeem them on demand for gold or silver at the official prices.

This 'requirement' stopped banks from over-issuing paper money, keeping monetary inflation in check. This gold standard feature is a favorite of its advocates today.

The Civil War, and all the spending for the War, disrupted the United States bi-metallic system. But in 1879, the country did go back to a metallic standard.

This time, however, it was a gold-only standard. Silver was relegated to use in small denomination money only. That move was not without a lot of political controversy though.

In 1896, Democrat party candidate William Jennings Bryan ran a populist campaign against gold and for using a silver standard system. Since there was more silver available than gold, it was felt the silver standard system would be less deflationary and less harsh on debtors.

U.S. Gold Standard System History: Surviving the Fed

The gold standard prevailed, though, and even survived its next obstacle...

When the Federal Reserve was established in 1913 as the issue of paper money, it was expected to work within the framework of the gold standard system.

The official gold standard ended in the United States on June 5, 1933 with the passage of the Emergency Banking Act. This legislation, put forward by President Franklin D. Roosevelt and approved by Congress, forced all Americans to convert their gold coins, bullion, and other financial instruments for U.S. dollars.

President Roosevelt also changed the official gold price from the long-standing $20.67 an ounce to $35 per ounce. This allowed the Federal Reserve, which had received all the gold the public gave up, to inflate its balance sheet and, in turn, the money supply.

This was a classic Keynesian economic remedy to combat the ravages of the Great Depression.

As World War II was ending in 1944, the leading western nations put together what was called the Bretton Woods Agreement.

It was a modified gold standard. Other countries pegged the value of their currency to that of the U.S. dollar. The United States, which held 75% of the world's gold reserves at the time, would then convert dollars to gold for foreign central banks. Gold was rarely exchanged, however, with most trading occurring in the currencies themselves.

The final nail in the gold standard's coffin came on August 15, 1971, when President Richard Nixon announced that the United States would no longer convert dollars into gold bullion.

A number of nations, led by Charles DeGaulle's France, were exchanging their dollar for gold as rapidly as they could at that time. DeGaulle wanted a full return to a gold standard system and a move away from U.S. dominance under the Bretton Woods Agreement.

Some gold standard followers have pointed to the recent move by Germany's Bundesbank to repatriate German gold from U.S. vaults as similar to what DeGaulle did decades ago.

A Return to the Gold Standard?

So is Germany's move the first step to a modern-day return of the gold standard?

Perhaps so, as many of the conservative political persuasion are pushing for such a return to monetary discipline.

But the key question is what form would a gold standard system take today?

A study conducted by the Bank of England in 2011 gave some clues. It found that economic growth under the modified gold standard, Bretton Woods, was superior (2.8%) than on a non-gold standard (1.8%) and to the old gold standard (1.3%).

The study also found lower inflation rates and fewer banking crises when some form of a gold standard is in place than when there is no gold standard.

The authors of the study wrote, "Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives."

Steve Forbes points to a practical version of the gold standard for possible use today introduced by Texas Republican Representative Ted Poe.

Under this version of the gold standard, the dollar would again be fixed to gold at a specific price. If gold moves below that fixed price, the Federal Reserve would add money to the financial system by purchasing bonds much as it is doing currently.

However, if gold moves above that fixed price, the Fed would be required to sell bonds from its portfolio, therefore removing money from the financial system.

Many worry that this will choke off economic growth just when an economy is gathering steam.

But this is not necessarily true. Forbes points out that under the Bretton Woods de facto gold standard system, Japan's economy blossomed in the 1950s and 1960s, growing at a 10% rate. Money supply grew in the country enough to fuel the economic boom.

The crucial factor to any future gold standard will be at what price of gold would the U.S. dollar be set. A wrong fixed price set for the gold to dollar ratio may set off either inflation or deflation.

Will we ever see some sort of gold standard again?

Perhaps. Heavy gold-buying by emerging market central banks, coupled with Germany wanting to repatriate its gold, says that more and more countries are taking a look at the long-term value of gold...

What do you think: Is it time to return to the gold standard?

Some argue the world has already returned to the gold standard - just in a stealth way that failed to hit your radar: The Secret Return to the "Gold Standard"

Source :http://moneymorning.com/2013/07/05/a-history-of-the-gold-standard/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules