The End of the Gold Standard: From 1933 to 1971
To understand the transition away from the gold standard, it is essential to explore its historical roots and the key events that brought about its eventual demise. The gold standard, a monetary system where currency is backed by gold and currency can be converted into gold, ceased to exist in the United States in phases, with significant turning points in 1933 and 1971.
The Early Years: 1879 to 1933
The gold standard was instituted in the United States in 1879, with the passage of the Coinage Act, which linked the valuation of the U.S. dollar to gold.
During World War I, the United States imposed an embargo on gold exports, temporarily deviating from the gold standard. However, this was a brief interruption, and the U.S. continued to operate on a gold standard for much of the early 20th century.
Flawed for Modern Times: The Great Depression
The gold standard faced significant challenges during the Great Depression of the 1930s. Bank runs and hoarding of gold by the public exacerbated the economic downturn. The inability of the monetary system to adjust and alleviate the depression led to increasing pressure for change.
President Franklin D. Roosevelt took office amidst a global economic crisis. To address the banking crisis and stimulate economic recovery, he implemented measures that marked a definitive shift away from the gold standard.
Key Events Leading to the Gold Standard's Demise
June 5, 1933: On this day, Congress enacted a joint resolution, effectively nullifying the right of creditors to demand payment in gold. This marked the official end of the gold standard in the United States. By eliminating the ability to convert paper money into gold, the government could adjust the money supply more flexibly.
Mid-March to Mid-May, 1933: Roosevelt declared a nationwide bank moratorium to prevent bank runs. He also banned the exportation and conversion of gold to maintain stability in the banking system. These measures aimed to restore confidence and prevent further economic collapse.
April 5, 1933: Roosevelt issued an executive order requiring all Americans to surrender gold coins and certificates in denominations over $100. This was followed by the passing of a law on May 1, where all Americans had to turn in gold at $20.67 per ounce.
May 1933 to May 1934: By these deadlines, the U.S. government had acquired 700 million dollars worth of gold, significantly increasing the Federal Reserve’s gold reserves.
The Nixon Shock: The Final Break from the Gold Standard
The final phase of the gold standard’s dissolution occurred in 1971. Facing global financial instability, President Richard Nixon announced a comprehensive economic plan.
August 15, 1971: Nixon announced that the U.S. would no longer convert dollars to gold at a fixed rate. This event, known as the Nixon Shock, marked the end of the Bretton Woods system and the complete abandonment of the gold standard.
August 15, 1974: President Gerald Ford signed legislation allowing Americans to own gold bullion again.
Conclusion
The journey from the gold standard to a modern monetary system was not straightforward. It involved significant political and economic challenges, including the Great Depression, World War II, and Cold War dynamics. The transition to a fiat currency system, where the value of money is determined by economic and political factors rather than the intrinsic value of a precious metal, marks a pivotal point in economic history. This shift has implications for monetary policy, global trade, and economic stability.
Further Reading
"How Did the Gold Standard Contribute to the Great Depression?"