Australia and the World Past and Present

The history of the gold standard in the United States reflects a long struggle between two competing goals – monetary stability and economic flexibility. For much of the nineteenth and early twentieth centuries, gold was seen as the anchor of sound money. Yet in times of crisis, that same anchor became a constraint which ultimately led to its abandonment.

The U.S. monetary system was established under the Coinage Act of 1792, which created a bimetallic standard. This linked the dollar to both gold and silver at a fixed ratio. In practice, fluctuations in market prices meant one metal tended to dominate circulation.

By the mid-nineteenth century, gold discoveries in California increased gold supplies and political battles intensified over whether the nation should favor gold alone or continue bimetallism. The Coinage Act of 1873, sometimes called the “Crime of ’73” by critics, effectively placed the U.S. on a de facto gold standard by ending the free coinage of silver.

The debate became central in the 1890s. William McKinley won the election of 1896 and in 1900, the Gold Standard Act formally committed the United States to gold alone.

Supporters of the gold standard believed it had some major benefits.

The first was price stability. Gold limited the growth of the money supply. Because currency had to be backed by gold reserves, governments could not simply print money at will. This constraint was thought to prevent inflation.

Then there was international trade stability. Under the classical gold standard (roughly 1870–1914), major economies defined their currencies in terms of gold. Exchange rates were therefore fixed. If one dollar equaled a set amount of gold and one pound equaled another, their exchange rate was stable. This reduced uncertainty in global trade and investment.

Finally there was fiscal discipline. Gold acted as a restraint on government spending. Deficits could not be financed indefinitely through money printing. This appealed strongly to creditors and financial institutions who valued predictable returns and low inflation.

In short, gold symbolised credibility and restraint. It gave people confidence that there was a rules-based system which prevented the political manipulation of money.

The classical gold standard collapsed during World War I when countries suspended gold convertibility to finance wartime spending. After the war, the United States returned to gold, and by the 1920s the international system was somewhat restored.

However, the interwar gold standard was fragile. Countries attempted to return to prewar gold parities, often at unrealistic exchange rates. This required tight monetary policies and deflation, especially in Europe. The system depended on cooperation between central banks, but political and economic tensions made that difficult.

The most severe test came after the stock market crash of 1929. As banks failed and prices fell, the U.S. money supply contracted sharply. The Federal Reserve was constrained. It could not aggressively expand the money supply without risking gold outflows.

When Britain left the gold standard in 1931, pressure intensified on the U.S. to defend its gold reserves. The Fed raised interest rates to stem gold losses, deepening the domestic downturn.

By 1933, the system was untenable. Upon taking office, Franklin D. Roosevelt suspended gold convertibility. The Gold Reserve Act of 1934 devalued the dollar to $35 per ounce, effectively ending the domestic gold standard.

The decision to leave gold was driven by several factors.

It was believed that there was a need for monetary expansion. Gold convertibility limited this ability.

Next was financial stability. Bank runs were fueled by fears that gold reserves would be exhausted. Ending convertibility removed the immediate threat of mass withdrawals of gold.

Finally there was the economic recovery. Once freed from gold constraints, policymakers could lower interest rates and pursue expansionary fiscal policy. Industrial production and prices began recovering after 1933.

In effect, policymakers concluded that economic recovery required flexibility, which the gold standard denied.

Although domestic convertibility ended in 1933, the U.S. remained linked to gold internationally under the Bretton Woods system established in 1944. The dollar was pegged to gold at $35 per ounce, and other currencies were pegged to the dollar.

This system worked for decades but came under strain in the 1960s due to U.S. deficits and overseas dollar accumulation. Foreign governments increasingly demanded gold in exchange for dollars. In 1971, Richard Nixon suspended gold convertibility entirely – an event known as the “Nixon Shock.” This marked the final end of the gold standard and the transition to a fiat currency system.

The gold standard in the United States was grounded in a belief in discipline, stability, and international credibility. For decades, it underpinned global trade. Yet its rigidity proved dangerous in times of crisis, particularly during the Great Depression, when the need for monetary expansion clashed with gold’s constraints.

Ultimately, the U.S. abandoned the gold standard. The modern fiat dollar reflects the shift from a metal-backed promise to a currency sustained by institutional credibility and economic management.