What Is the Gold Standard?
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The gold standard is a method of stabilizing a country's monetary system by tying money to gold.
On the gold standard, a country can only print as much money as it has gold to back it. Anyone holding money in a country on the gold standard could (theoretically) redeem that money for a set amount of gold, depending on the dollar to gold ratio that is agreed upon.
Money whose value is tied to a rare or precious commodity like gold is called specie money. So the gold standard allows a nation to print a type of specie money: the printed money is backed at a set ratio to actual stores of gold.
The gold standard has a very ancient and turbulent history. The earliest banks were set up in large part because traders did not want to carry gold and other precious items (like grain, gems, possessions) around with them on long journeys.
Banks would issue currency in exchange for the trader's precious items and stores of grain, and when the traveller or trader reached his or her destination the currency was then turned in for an equivalent amount of precious cargo.
Currency was also used (as currency) for food, lodging and supplies, but in early times it money was not always accepted everywhere.There was no standardization in either currency or banking, so it wasn't a done deal that you could use the money for anything en route.
When the traveller or trader returned, the gold and precious items on deposit were given back, minus whatever was spent during the trip. Of course the trader hoped to return richer, with more precious items than he left on deposit. That was the whole point of the journey.
Although this system of currency backed by precious things sounds simple, and although it did facilitate the growth of both banking and trade, it was not without real problems.
One of the most common problems was the lack of a standard currency and equivalent values across cultures. Travelers could not be assured that the banker at the other end of their journey would value their currency at the same rate as the banker who issued it, even though it was tied to a commodity. Different bankers issued different kinds of currency, causing further confusions. Some bankers refused to change out currency altogether.
Early bankers, (originally called money changers) were initially prohibited by widely held religious beliefs from charging interest for their work changing out money for valuables, but this prohibition did not last.
As the practice of charging interest for money changing gained acceptance, another complication was added into the mix.
What Is Good About the Gold Standard?
The gold standard limits the ability of government to manipulate the money supply, which in theory leads to a more stable economy. A government's money supply on the gold standard is limited by the amount of gold it has. Countries with lots of gold have lots of money. Countries with no gold go looking for it.
Much of the exploration of the world in the 17th and 18th centuries occurred because of the gold standard. The Spaniards who discovered the New World and who brought disease and slaughter to the indigenous tribes there were looking for gold. Gold has a very bloody history.
Similarly, the westward expansion of the 19th century in the United States, although well underway due to the European lust for property and land, was given a turbo boost by the California Gold Rush. That wasn't pretty, but it did lead to development of the west.
The gold standard also prevents massive government debt and prevents inflation, which is what happens when there is too much money chasing too few goods.
Productive nations are rewarded on the gold standard for their productivity. The more they export, the more gold-backed money they take in, and the richer they become.
What Is Bad About the Gold Standard?
The gold standard tends to encourage an obsession with finding, hoarding, and amassing gold at the expense of developing industry and trade.
Making a country's size and economic health dependent on its supply of gold rather than on the industriousness and resourcefulness of its people tends to discourage innovation and maintain the status quo, whatever that happens to be.
The gold standard also creates deep global inequities that are not easily remedied. Countries with no gold and no resources have few options for getting either, and wars begin to make sense. Poor countries strike out. Rich countries develop defense issues.
Countries who amass great quantities of gold run into trouble on the gold standard over security. As countries become obsessed with keeping and protecting their stash of gold, any instability in that country's economy can cause people to demand gold for their money, causing widespread collapse of the internal financial system. This is essentially what happened during the Great Depression, after the Crash or 1929.
Between the years of 1890 and 1905, when the U.S. was on the gold standard, government actions to protect the gold supply resulted in no fewer than five major recessions. This intense instability caused increasing popular demand for a central federal bank to oversee and regulate the money supply. In 1912 the Federal Reserve Act created such an institution, but only 17 years later the Crash of 1929 ushered in the Great Depression anyway.
The gold standard has a certain common sense appeal because it seems on the surface to be a way to create financial stability in a nation by means of a one to one practical correspondence of money to precious thing.
It seems to simplify economics and finance.
In actual practice, and in terms of history as it actually happened, the economic instability experienced by even wealthy nations like the U.S. on the gold standard was significant and difficult. The gold standard intuitively feels like it should create a simple and stable economy. The history of banking and of the U.S. economy on the gold standard reveals that in practice that has not been the case.
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Isn't What We Have Way Worse?
The U.S. and most nations of the world do not have specie money that is tied to any precious metal or single commodity. Money issued by the U.S. and virtually all other developed nations is called fiat money, and is tied to nothing but the reputation and natural wealth and resources of the nation issuing it.
Fiat money can be manipulated by governments toward a variety of ends, but not easily and not without endless complications. There are outer limits. If a country with few resources and a terrible standing in the global community prints tons of money, it won't be worth much of anything. Many people feel that that is what the U.S is doing now. I think that myself.
The question though is not, wouldn't the gold standard be better?
The question is, what next?
Right now, the U.S. does not have anything near enough gold in its reserves to reinstate the gold standard even if it desired to do that, and there is no compelling reason why it should desire to do that.
As I hope I have made clear in this very short article, economic instability and financial crises happened with such regularity on the gold standard that the public at that time pressed the government for a central bank and got one--the same one that is now the butt of a thousand conspiracy theories.
Even before the 19th century, problems with the exchange of currency tied to precious metal were a recurring theme in hysteria surrounding banks, bankers, and international relations. So not only does the gold standard not lead to instant internal stability, it doesn't lead to international stability either.
So where is the motivation to reinstate the gold standard?
- We don't have enough gold to reinstate the gold standard.
- It has to be a world standard, not a single nation standard.
- The gold standard doesn't produce internal stability.
- The gold standard doesn't produce international stability.
It does however have a broad popular appeal right now because it sounds simple and straightforward. It sounds like a common sense solution to horrendously complicated, messy, intractable problems with current global economic stability.
It's not.
It's not even an option. But you hear it over and over again, especially from Libertarians.
Look, the global economy is melting down. The end. The gold standard is off the table and it can't fix the mess at this point anyway. We don't know what will happen next.
That's the simple truth.
Things are really, really screwed up and nobody knows how to fix it at this point.
Invoking an imaginary simpler time when gold was king doesn't help. It might make some people feel a little better while the world collapses around their ears, but it bears no relationship to any kind of reality that anyone with access to a public library understands.
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Comments
You have a way of explaining stuff like this in ways that even I can understand. I really appreciate it, as it's difficult to find such clear, no-nonsense explanations anywhere. Thanks. I don't exactly feel any better, but at least I understand how the gold standard wouldn't help anything --
Hi Tom! Thanks!
Teresea--Thank you, that was nice of you to say. I wrote this because I keep hearing all these instant fixes, especially from the right and from Libertarians, and they always bring up the gold standard as if it was part of this magical time in American history, and it totally was not. It wasn't even all that magical in terms of world history. It was kinda bloody and horrible. In fact, banking in general has had a bloody, messy, spasmodic history that would convince any alien visiting this planet to conclude the whole money business is a form of insanity. But thanks. I wish I did know how to fix everything. If I did, I guess I wouldn't be hanging out at Hub Pages. :)
Thank you for clearing this up. It does make perfect sense now. People would like the world to be simple, but it's not. What comes next is going to take innovation, creativity and actual thought.
In living systems sometimes complexity creates stability. It's true in nature that a diverse complex ecosystem is much more stable than a simple one. Maybe this is true in an economic system too, and that a genuinely healthy one would not be that easy to predict or control -- at least from the point of view of those that would control it in a way to bring themselves all the chips, like the gold standard applied by gold-rich countries.
Robert--I like the way you put that, it's very insightful and I think it's close to the truth somehow. Complexity, diversity, these are traits that are valued by nature but not so much sometimes by man. I do think we are on the cusp of a new age and none of us really can totally predict what will happen. Destruction and creation are always back to back and we're definitely in the destruction phase now. Thanks for your thoughts.
Hi Pam, any thoughts on the following links, one of which I picked up from CWB, the other from someone who stood for election in my home town recently. I'd really like to hear your reaction to these ideas as you are the best thinker on these matters that I know and I respect your views. http://www.monetary.org/ & http://www.moneyreformparty.org.uk/ Thanks.
Is the world situation depressing or what? I think having gold these days would be sensible, if only I could afford it!
Hi CJ--I did look over the links. I like Dennis Kucinich. Basically he wants the Fed audited. I think that's a good idea, as it's clear at this point that the Fed is committed to maintaining the current financial system and the current financial system favors huge banks that elevate usury to some kind of high magic. That's fubar beyond belief, and it needs to stop.
As to monetary reform, that's a lot trickier and more complicated. I'm not fully informed on what kind of monetary reform these sites specifically advocate, but when they about money as debt, they're talking about fractional reserve banking and leverage, as well as the mess that was created when the wall between retail and investment banking was torn down in (I think) 1999. These problems could be addressed it seems to me by re-regulating the banking industry, which I don't see as monetary reform, just re-introducing strict, sane regulations--the same ones that served us well for over 70 years until the Reaganomics geniuses decided we didn't need them.
We also need some kind of antitrust safeguards in place so banks don't GET "Too big to fail." Maybe I could write another hub on fractional reserve lending and so forth. That might be helpful.
But in terms of monetary reform, since that issue seems to be being raised all over the place now, we have a real problem, at least in the U.S we do. Fiat money is based on reputation and production, and we don't make much anymore and our reputation is dropping. So if you won't be having a fiat money system, and the gold standard isn't an option, then what? Right now the financial industry is our main industry. We export debt. That's what we do. That's nuts. To change the money system you'd have to change that first, and that's no small task.
Wow, that was too long an answer. Sorry. :)
Hi Gypsy Willow--It is kind of depressing! But something unexpectedly good could happen as easily as more bad. That's what I'm hoping for. :)
Hi Pam,
Loved the Article as usual,
I don't think the Gold Standard was anything more than what Fiat money tries to accomplish. Basically, it doesn't matter what element you use for exchange, be it gold or felled trees rolled into paper.
All monetary systems exist to keep a certain class of people above another class of people. I think certain humans have existed through all time with schemes to make others believe the shiny little rocks have value to gain the only thing that does have value; The Land.
Land is the only thing that can consistently make the only thing that can keep humans alive, and that is food. Money is just a fancy 3 card Monty game to make sure that the majority of people are precluded access to the one thing they need to survive. The land, if you want access to a piece you must do my bidding.
I like the line from Braveheart, "My people fight for me, because if they don't I will throw them off of my land and their women and children will starve."
Nothing has changed we just made it so complicated it creates the illusion that things are different they are not. You can't eat gold no more than paper. Therefore you most work in order to get gold or paper or shiny rocks or whatever valueless object you are told to value, in order to purchase food. Ironically all industry makes the same circle from land to product to consumption. Some are more rigorous but they refine to the same place.
On the Macro, it works like this you work the land to create the product and you are paid less than what you will be charged for the product. So on a large scale ultimately if you do not own the land you will become impoverished by simple mathematical rule that if you always pay more than you are paid eventually you will run out. That is why 98% of all humans die in poverty.
More accurately every human represents a lifetime of wealth by their labor, some are more valuable than others, if you are at the top that makes no difference, because you are greedy and you want it all regardless of how much that amount is no conquest is complete that is not absolute!
That is why making loans to people who cannot pay them makes perfect since to the Rich. Who cares if they pay back the paper, or gold they will work a lifetime and never have a dime in real wealth, we will have collected it all. Essentially in the end their life value is given over to the land owners.
I think a good thing to look at would be how the actual land of the Americas was consumed and consolidated into the hands of a very small number of people. An expose if you will on how to conquer a country by using the concept of the rule of law and complicated finance. It is a trick they use to convince us in our souls, something is right, when it only serves to enslave us.
As you can tell I haven't got much work to do today, Hope all is well for you.
TMG
Hi Money Guy,
Wow, it's so good to hear from you. Everything you said is, well, so well said! I agree. It's not this money system or that money system it's money--the purpose of money, since money began is to swindle others and so it continues, murkier and murkier.
It always gets me when people get on about living off the land and owning a piece of land and living simply off that land, as if at some point in American history we had this sweet happy live off the land in peace situation. Uh, no. Not ever. Where did that land come from? Dead Indians. Swindled Indians.
Before that there were wars too, between tribes, but it wasn't the same sort of situation because although battles over territory still happened, there wasn't this same concept of individual ownership. Hunter gathering socieities have to share out--to get too attached to individual ownership is considered pathological. That's a survival tenet.
But with agriculture comes the need for serfs, then slaves, then plenty of food leads to cities and industry and law and blah blah blah.
We are taught lies about our own history and have to seek out the truth and it's not like it's all that easy. Then you try to share it and people tell you you're unAmerican, blah blah blah...
Yes, I guess that WOULD make a good book! LOL!(There, I started the Intro--You finish it! I'll buy a copy!)
excellent stuff.
So True. Another excellent hub as usual. Most people who talk of living off the land have never had to do it. I've been a farmer and I can tell ya, it's a hard life with not a great return except you have food and the feeling of satifaction from hard work. Then the bugs and weather hit and you can't even buy bologna.
The current economic system isn't great, it's just better than the alternative.
Hi Rv--I'm a city girl living on my first acre with a big vegetable garden and I can vouch for what you say. It ain't that easy!
You guys are deep, and this all reminds me why I switched my college major away from economics. Besides being too complicated for me, economics frustrated me because, more than any other discipline, it seemed to be full of explanations as to why things didn't work, but no one could provide a new and better direction for the future. Maybe that was so because people were reluctant to look at what I see between the lines of your hub and some of the comments, namely, that there is something fundamentally rotten about money systems of any kind, and replacing one system with another avoids the real problem.
Wow. Okay, I totally get it. This is a fascinating read Pam.
Nice history lesson here on gold, and you are right PG, our world is in a huge mess and it is scary as hell…
Hi Pam, nothing you ever write is "too long". I still think you should write a book on economics if you ever get the time. Meanwhile, here's a quote from that AMI site which makes sense to me: "Money has value because of skilled people, resources, and infrastructure, working together in a supportive social and legal framework. Money is the indispensable lubricant that lets them “run.” It is not tangible wealth in itself, but a power to obtain wealth. Money is an abstract social power based in law; and whatever government accepts in payment of taxes will be money. Money’s value is not created by the private corporations that now control it. As Aristotle wrote: “Money exists not by nature but by law.”" This is from http://www.monetary.org/amacolorpamphlet.pdf. I think a lot of us would really appreciate it if you wrote a hub about it. We need a real citizens movement backing a sane approach to money creation. Remember when the Argentinian banks failed? The citizens took to the streets and banged pots and pans. Maybe that's what we should do now.
Hi Steve--That does seem to be the consensus, that the fundamental problem goes much deeper than any one system. I never took a single economics course in school. I'm sure I would have flunked if I had. I got interested in how money works while I was at the bank in the call center. I saw this big mess coming, and my supervisor kept saying no you're crazy, and then it really happened, so that go me kinda hooked. But the more I learn, the more disgusted I get. At some point I'll probably just put it down and move on to something less depressing.
Frieda and Nancy--Thanks! It is scary stuff, that's for sure. :)
CJ--I like that quote. I think that's how money should work at its best. Every so often someone calls me on bashing corporations and I could almost use that quote, slightly modified, as a response if I wanted to respond. What is so wrong now is not money itself or corporate structures themselves but the lack of support for the skilled people and resources underlying both. In the case of corporate banking, it's the issue of profit sucked out with no value added in. I agree about the need for citizen action. I don't understand why more people aren't acting up already. I will look at the link more carefully and see what I can put together. Thanks.
As usual, this is a brilliant Hub. You have taken a very complex subject and made it understandable.
Pat ( being from Nebraska) , wonders why you didn't mention William Jennings Bryan. During his day he was very vocal in his opposition to the gold standard. He rose to political prominence on the back of this, plus of course his skills as a speaker. His 'cross of gold speech' ends with these words:
"If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."
That speech was deliverd July 9, 1896 at the National Democratic Convention in Chicago.
You can view the whole speech (and it is very long, they didn't do sound bites in those days) on http://historymatters.gmu.edu/d/5354/
Hi 2patricias--Thank you for that quote and the link! I didn't mention WJB because I wasn't familiar with his speech or with much about him at all, and I do appreciate the chance to read both the speech and the circumstances surrounding his opposition. I wanted to write something simple and straightforward and I'm glad it came off that way. There were so many tangents to go off on that felt like fun, but it's already too long for HP really. I appreciate your comment and the reference. :)
This is a fantastic hub. Thanks for sharing it. I was infact looking for an article on gold standard, and i got it. Very well explained specially the pros and cons. Keep them coming
Thanks jay! I'm glad it was helpful. :)
Pam, I'm not sure if you ought to pursue a career in horror writing (Palin's hub) or in enocomics .... I tend to think the later :-) You are the real queen of Economy Made Easy and you have a wonderful mix of facts and opinion which brings these otherwise "dark" topics closer to me as a reader. Super hub!
Thanks Elena! I think my days of pursuing careers are pretty much over. But I'm glad you liked this :)
It's always very gratifying to me that you read my hubs.
Pam, you should probably be our Secretary of the Treasury.
“…Money exists not by nature but by law.”
Aristotle (Ethics 1133)
BOTH ARISTOTLE AND PLATO NOTED THE PARAMOUNT MONETARY PRINCIPLE, THAT THE NATURE OF MONEY IS A FIAT OF THE LAW, AN INVENTION OR CREATION OF MANKIND AND SOCIETY, RATHER THAN A COMMODITY.
“THE LOST SCIENCE OF MONEY”
Money is NOT a commodity. It is a contract. Tying currency directly to some finite “precious” commodity is a very bad mistake.
Basically, that’s what caused the fall of the Roman Empire.
In today’s world, currency isn’t even needed. It’s just a way of creating scarcity and ensuring that all wealth and power remains in the hands of a small minority.
Modern “economies” should be based on resources and the wise use and equitable distribution thereof.
If people are just too stuck in the dark ages to get by without currency then it should be printed, issued and controlled only by a national treasury and NEVER by private banks.
In 1862, President Lincoln went to the bankers to seek funding for his effort to keep the Union intact. Since they did not wish for his success in that endeavor they offered usurious loans at rates of interest as high as thirty-six percent. Lincoln declined this offer and instead began the printing of what came to be known as “Greenbacks”. They were declared full legal tender, issued by the government without interest and used to finance the military effort. He later made it clear that he intended for this monetary system to become a permanent fixture of the Republic saying in part: “…the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.”
The response of the bankers in London was actually printed in the Times of London making clear to anyone who could read exactly what motivated these criminals.
"If that mischievous financial policy, which had its origin in the North American Republic, should become indurated down to a fixture, then that government will furnish its own money without cost. It will pay off debts and be without a debt. It will have all the money necessary to carry on its commerce. It will become prosperous beyond precedent in the history of civilized governments of the world. The brains and the wealth of all countries will go to North America. That government must be destroyed or it will destroy every monarchy on the globe."
Wow CWB--What is all that code? Was it a picture or something?
What code?
That is so weird--When you first posted this it was all code. Now I see it as words. Sorry!
I think it has something to do with the fact that I've switched to Mozilla Firefox. When I compose comments in MS Word and paste them on HP sometimes there's a bunch of junk at the head of the comment that I have to delete. I've been trying to figure it out but haven't got it yet. I must have missed some when I pasted the section about Lincoln.
I get that sometimes too when I use Safari on my Mac. It's weird. You'd think this stuff would be standardized by now but apparently not.
Pam - excellent commentry on current financial mess we all find ourselves in - well done!
Thanks Rik!
Pam - another excellent explanation. Of course there's nothing inherently valuable about gold. It's a great material for plating electrical contacts because it conducts well and doesn't corrode, but the ancients didn't know that! The problem isn't with money but with interest. Money is neutral and obviously a great convenience, but interest (and particularly the differential between borrowing and lending interest rates) is a mechanism for profiteering from every transaction, without in any way adding real value to the goods or services in question. Now, what to do about it...
Hi Paraglider--You are so right. Interest has been an issue since the ancient days when banking was called money changing and it's still a huge issue. I wrote a hub about the history of credit cards and I get hate mail there--along the lines of , "Don't go into debt PAM and you won't have issues with this." Well, I wasn't talking about me or whining, I was just recounting the actual history of credit cards, which most people don't know, and much of it has to do with circumventing usury laws. I swear, there are times when I really do hate the internet. I think I need a vacation. The U.S. is such an uncivil place.
I wrote this gold standard hub because for some time now I've been sick to death of Libertarians rewriting U.S. history so as to make the gold standard sound like the golden age of finance.
That happens here a lot too. Why read history when you can just make it up to fit your crackpot political ideas?
But I'm slipping into a rant... Sorry PG, thanks for visiting.
I like some crackpot ideas. Resource based economies.
Hi CWB--I like the idea of resource based economies too. I think eventually the system we have now will collapse, and hopefully something better will replace it.
Worrying times both sides of the pond
pgrundy,
Another excellent and timely hub. You are correct in saying that there is no way the gold standard can fit into our economy today because we just don't have 7 trillion dollars in gold.
We could however limit the spending that is done and stop punishing small businesses by taxing them to death with government handouts or cap and trade. They are the people who create the most jobs and that is what is increasing the unemployment in our country. As long as the tax and spend people are the majority we will continue our descent in this recession. I love our country and still believe we will somehow dig our way out of this mess, but but not with the philosiphies put out there by the previous or current administrations.
Hi hglick--I appreciate the ideas and your thoughts. If I knew how to fix this mess I guess I wouldn't be writing at Hub Pages, I'd be busy fixing the mess. Thanks for commenting :)
Hi,
What a hub! Fantastic.
Anjali
Tom Cornett says:
4 months ago
Great hub! I learned much from it. Thanks!