In our last installment in this series, we discussed how gold became the basis of an entire international money system. This brought us to 1900, when the U.S. officially joined the gold standard, smack-dab in the middle of what’s now known as the classical gold standard, a period of extreme economic growth between 1880 and 1914 when most countries were on this system.
Spoiler: It didn’t last. Read on to discover why.
A Break from the Gold Standard
Everything was relatively grand with the gold standard until 1914 with the outbreak of World War 1. War hindered the ability to move gold between countries, a significant problem when an international money system is based on it. To both counter this issue and fund the expense of war, many countries suspended their adherence to the gold standard, either formally or informally, in 1914. The United States followed suit and partially suspended the gold standard when it entered the war in 1917.
The Gold Standard’s Slow “Comeback”
Once the war ended in 1918, nations didn’t immediately run back to the gold standard, though it was widely perceived as an essential institution. In particular, those with the longest participation in the war had some serious financial issues to contend with, among them, the effect of four years’ inflation. Jumping back on the gold standard would put these countries in financial turmoil, likely spurring deflation and unemployment.
The United States, on the other hand, didn’t experience the same financial fallout from the war, partly because they devoted fewer years to the cause. For this reason, they were able to return to the gold standard in 1919, and the U.S. Federal Reserve (a.k.a. The Fed, which was signed into existence in 1913) became the de facto lead on managing the gold standard.
By 1925, Great Britain was back on the gold standard, which was reenvisioned as the Gold Exchange Standard, where the U.S. and the U.K. held gold reserves, but all other countries could hold gold, dollars, or pounds as reserves. This signaled the standard’s return to international prominence.
Gold Loses Its Shine
The weakness of the gold standard became more even apparent with The Great Depression (1929-1939). As confidence in money declined, people began converting currency into gold and hoarding it. In fact, Great Britain’s banks nearly ran out of gold. To combat the issue, they abandoned the gold standard altogether in 1931, never to return, leading to other countries jumping ship too. The U.S., which had major gold reserves, continued to use the gold standard until 1933, when President Franklin Roosevelt controversially and temporarily suspended the gold standard to prevent a catastrophic run on the banks.
But this was all part of a larger phased plan, and the U.S. was back on the gold standard by 1934 with the Gold Reserve Act, increasing the value of gold from $20.67 an ounce to $35 an ounce and reconnecting American money with the world.
Stay tuned for our next installment about the further decline of the gold standard and the rise of fiat!