Saturday, 22 June 2013

The rise and fall of the gold standard

There is a new Cato Policy Analysis piece out on The Rise and Fall of the Gold Standard in the United States (pdf) by George Selgin. The executive summary reads,
There is, in informal discussions and even in some academic writings, a tendency to treat U.S. monetary history as divided between a gold standard past and a fiat dollar present. In truth, the legal meaning of a “standard” U.S. dollar has been contested, often hotly, throughout U.S. history, and a functioning (if not formally acknowledged) gold standard was in effect for less than a quarter of the full span of U.S. history.

U.S. monetary policy was initially founded upon a bimetallic dollar, convertible into either gold or silver. Although officially committed to bimetallism, from 1792 to 1834 the United States was functionally on a silver standard. From the Civil War until 1879, a fiat “greenback” standard predominated with the exception of a few states, such as California and Oregon, where a gold standard continued to operate.

Between 1870 and 1879 numerous countries embraced gold monometallism. France ended the free coinage of silver in 1873, while the rest the Latin Monetary Union followed in 1876. But it was above all Germany’s switch to gold that prompted the United States to demonetize silver and embrace gold. Thus began the era of the Classical Gold Standard in the United States.

The Classical Gold Standard Era lasted until about War World I, when as common in times of war countries abandoned their commitment to convertibility. What followed World War I was the Gold Exchange Standard, whose failure resulted from its dependence upon central bank cooperation. Post World War II, the Gold Exchange Standard was replaced by the Bretton Woods System and its reliance on a fiat dollar. Bretton Woods finally came to an end when President Nixon closed the “gold window” on August 15, 1971.

This paper reviews the history of the gold standard in the United States, explaining both how that standard came into being despite having been neither formally provided for nor informally established at the nation’s inception, and how it eventually came to an end. It concludes that the conditions that led to the gold standard’s original establishment and its successful performance are unlikely to be replicated in the future.


Anonymous said...

The closest thing we've seen recently to a gold standard is the Euro - particular their effects on the PIIGS. Just as if they were on a gold standard, PIIGS cannot devalue their currency --- forcing nominal devaluation in the real economy.

The resulting dislocations - 50% youth unemployment in Spain, virtual economic collapse in Greece - and certainly more severe than any finance minister would inflict on their own populace, and are already at the limits of democratic viability.

Unfortunately these corrections are nowhere near those actually required, that would have been forced on these economies with a real gold standard, and thus an inability to borrow or print Euros. Primiarly, of course, the end of the economically (and morally) bankrupt welfare systems that are still expanding throughout the "advanced" west - even in the US with Osamacare...

rivoniaboy said...

Markets will rock, roll and lay down on the floor in spasms of laughter and revulsion. At the end of the day... when the dust settles and the music stops... gold will be the last man standing.

Bill Bonner