We have already discussed this topic at individual stages, but here it is briefly and in chronological order.
Throughout history, gold has been used as a currency, medium of exchange and store of value: the value of any good or service on the market was based on the price of gold. Since it was difficult to weigh gold without proper equipment, coins of various denominations were minted immediately. The earliest known mention of the gold coin trade dates back to 643 BC. in Lydia (modern Turkey). Since at that time the value of coins was determined by the value of the metal, the country with the most gold had the greatest wealth.
It was with this that the race between countries for the New World in search of gold began.
The gold standard is a monetary system in which the unit of calculation is a standardized amount of gold, that is, the value of a currency is directly related to the value of gold. A country using a gold standard cannot increase the amount of money in circulation without increasing its gold reserves.
Many believe that the gold standard is the beginning of the US monetary system, but the first standard was bimetallic, in which both gold and silver were used as currency. It functioned from 1792 to 1834.
Bimetallism
In 1785, the US government adopted its own currency, after which in April 1792 Treasury Secretary Alexander Hamilton passed the first coinage act, according to which $ 1 was equal to 371.25 pieces of silver minted into a coin of 416 particles. Gold coins were used to represent amounts of $ 2.5 and $ 10. The minting of the first US dollars was started in 1794, before that Spanish coins were in circulation.
The main problem of using this system was foreign exchange and fluctuations in the price of metal in various world markets, which led to a complex settlement system. As silver became cheaper, it was used almost exclusively for domestic purchases, and gold was intended to be imported from abroad. In fact, the US economy operated on the silver standard for the first 40 years. At the same time, the market continued to exchange pure metals between sellers.
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1834 - transition to the "gold standard"
In 1834, Congress took action to remedy the problems caused by the ratio of the price of silver to gold and restore the use of gold coins for domestic operations. For this, the amount of gold in gold coins was slightly reduced. In addition, the requirements for the minting of gold and silver money were changed.
The positive effect of these decisions was short-term: very quickly, the population found that the innovations were convenient for paying off debts that existed before the gold grade adjustment. This way people were able to pay off their existing debts with slightly less money than they would have had to spend before the change. As a result, this led to a decrease in gold prices compared to the ratio of prices in the world market. As a consequence, only gold was used for transactions in the United States.
By 1850, almost no one was using silver coins and they had completely disappeared from the market. This became a problem as the country did not have gold coins equivalent to 1 US dollar. As a result, in 1853 another act was issued to issue new silver money for transactions worth less than $ 5.
1862 - issue of paper banknotes
Until 1861, the United States did not actually have a single banknote system. On July 17, 1861, Congress passed an act requiring the Treasury to issue new banknotes. For the first time, paper money began to be issued without conversion to silver, gold, or any other metal - making it the first legal tender in paper money (the United States briefly abandoned the gold standard during the Civil War).
Although there were no legal tender paper money in the United States prior to the Civil War, there were many varieties in the country (Treasury notes and bills of exchange). The purpose of this paper money was to anchor the promises of one party to pay in gold or silver to the other.
1879 - the "classic" gold standard
When the civil war ended, Congress decided to revert to the metal standard, finding out the market rate of the dollar against gold, and gradually phasing out the dollar. By 1879, the government had reached full parity between gold and the dollar, which meant the country's official return to the gold standard. However, paper money also existed and was legal tender. The period from 1879 to 1913 considered one of the most economically stable in American history.
1900 - the second "gold standard"
Many silver producers and the public believed in cheaper money and wanted silver to return to its original status. This situation caused serious concern for the US government, which was not interested in returning to the silver standard. To appease the silver producers, the United States Treasury decided to buy the metal and mint silver dollar coins. But their value was kept at an artificially high level (well above market value) to equate one to one with gold.
By 1900, the move back to the dual currency standard in the United States was beginning to cause concern. To allay these concerns, the government drafted the Gold Standard Law, which declared the gold dollar the standard unit of account, and any type of money issued by the government maintained parity with gold. However, silver dollars remained legal tender.
1913 - Fed era
In response to recurring banking panics and shrinking gold reserves, the Federal Reserve was established as the lender of last resort. The Federal Reserve's functions included not only maintaining the gold standard, but also regulating the issuance of Federal Reserve notes, which were 40% backed by gold.
1928 - the gold standard and the Great Depression
During the height of the Great Depression, the United States again had to abandon the gold standard. After the stock market crashed in 1929 and the price of gold rose, people en masse wanted to exchange their dollar holdings for gold. The situation worsened after the bankruptcy of a number of banks. People tried to keep their savings in gold, because they did not trust any financial institution.
The Fed continued to raise interest rates in an attempt to increase the value of the dollar, which subsequently exacerbated the economic crisis by increasing the cost of doing business. Many companies have gone bankrupt, creating record unemployment rates in the country.
1933 - gold is illegal
“Free circulation of gold coins is not necessary,” President Franklin Roosevelt said. He nationalized gold by issuing an ordinance (the Gold Reserve Act of 1934) that all gold coins, bars and certificates must be transferred to the Fed at $ 20.67 an ounce. The accumulation of gold in coins or bullion was punishable by a fine of up to USD 10,000 and / or imprisonment. The United States soon held the world's largest gold reserves. By the time the banks reopened on March 13, all of their gold had been transferred to the Federal Reserve. Banks could no longer redeem dollars for gold. Moreover, no one could export gold. The Great Depression ended in 1939.
1944 - Bretton Woods Agreement
Representatives from the United States and 43 other countries meet in Bretton Woods, New Hampshire to normalize commercial and financial relations. The United States held most of the world's gold. As a result, most countries have simply pegged the value of their currency to the dollar, not gold.
The 1944 Bretton Woods Agreement established the exchange value for all currencies in terms of gold. Each currency has a fixed parity against the dollar, which is pegged and can be exchanged for gold at $ 35 an ounce. (However, this is not the case for Americans, who still cannot hold gold.) The dollar is becoming the world's reserve currency.
Central banks maintained fixed exchange rates for the national currency and the dollar, buying their country's currency in foreign exchange markets if their currency became too low against the dollar. If the exchange rate, on the contrary, rose, they additionally printed the national currency and sold it.
The end of the gold standard
In 1960, the United States had $ 19.4 billion in gold reserves, including $ 1.6 billion in the International Monetary Fund. This was enough to cover USD 18.7 billion in foreign currency equivalent. However, Americans bought more imported goods, paying in dollars, which led to a large deficit in the balance of payments. This raised concerns that the US would no longer be able to provide gold support for the dollar. In addition, the Soviet Union became a major oil producer and placed its dollar reserves in European banks. These reserves became known as Eurodollars.
By 1970, the United States held only $ 14.5 billion in gold against $ 45.7 billion in foreign currency equivalent. At the same time, President Nixon's economic policies led to stagflation. More and more banks were buying back their assets in exchange for gold. As a result, the US could no longer fulfill its obligations.
1971 - closing of the "golden window"
August 15, 1971 President Richard Nixon "closes the golden window." He changed the dollar / gold ratio to $ 38 an ounce. The Fed was no longer allowed to buy back dollars in exchange for gold. This made the gold standard meaningless.
The US government revised gold prices to $ 42 an ounce in 1973 and then, in 1976, completely decoupled the value of the dollar from the precious metal. over the decade, gold has risen in price by 2330%: from $ 35 per ounce to 850. The complete abandonment of the gold standard allowed more fiat (paper) money to be printed and contributed to economic growth.
Author: Sophia Glavina
