What, exactly, was the reasoning behind the drop of the gold standard during Wilson’s presidency? I have never understood how it could keep the economy from going sour when the money has no backing. Would it be more beneficial for the US to go back to gold, or, rather to platinum? Wouldn’t the dollar be less succeptible to large drops with backing other than our less-than-perfect honor?
“I hear the mermaids singing, each to each. I do not think that they will sing to me.” -T.S. Eliot
I think the gold standard was dropped later than the Wilson administration. I think it was dropped by one of Franklin Roosevelt’s New Deal policies, but some people seem to think it persisted until Nixon.
I can see definite advantages and disadvantages to the gold standard. One of the disadvantages is that the money supply under the gold standard is more dependent on the success of various mining projects than on any economic policy. If the size of the economy increases, and no new gold is found, there will be deflation. Prices will fall for no good reason.
Periods of economic expansion in American history were too often ended by deflationary depressions - the real value of the economy might grow by 10% but the supply of gold might have only increased 1%. Creditors would benefit in theory because the debts owed them would increase in value. Debtors would be in trouble because their money debts would likewize increase. And in practice, everyone would suffer because the debtors would default, the creditors would write off tons of assets, people would run on the banks, the banks would close.
So on the whole, I think it’s better to have economic policy control the money supply, rather than the luck of some prospector.
You are missing an important point.
There are commercial gold coins that contain 1 ounce of gold. If the economy goes bad, people want gold. Demand causes the price to go up. The value of your gold coin goes up compared to the dollar.
With the gold standard, a dollar bill was worth $1 in gold. As the price of gold goes up, your $1 bill buys less and less gold. You still are losing ground.
With a bed economy, people horde their valuables, gold and dollar bills. No-one can spend anything.
The government wants to help out by making money available to loan out. With a gold standard, it can’t print additional money. Without a gold standard, it can just print up some money and send it to banks telling them to loan it at x%.
People now have access to extra money which they borrow and spend on things. Since people are now buying stuff, businesses can sell things [and make money], businesses order stuff from factories, which need to hire people to make it. These people earn wages and repay their loans. The economy is good again.
The downside is that the government can print up so much money that it becomes worthless. The Federal Reserve works to control the interest rate so it can control how much money is in circulation. You need enough so people will spend it, but not too much.
Boris: I believe the Federal Reserve System was instituted in 1916 or so, but I will check up on it.
Starfish: Thank you for the info. I’ve never heard the basis against a backed economy, but it makes much more sense that way. I’m not much for govt regulation of the economy, but I think I might have to concede this one. 
“I hear the mermaids singing, each to each. I do not think that they will sing to me.” -T.S. Eliot
In brief, the gold standard was set up because no one trusted paper money. As others pointed out, the temptation was to print as much as the stuff as you can, creating inflation and making it worthless. The U.S. had bad experiences with paper money during the Revolution and the Civil War, when they had to print money to pay their debts.
Paper money is based on trust. In order to create trust, the government hit upon the idea of backing their bills with the equivalent amount of gold or silver. In theory, you could redeem these gold or silver certificates for the metal itself. This allowed the government to use paper money and ensure that people had confidence they could use it to pay their debts.
As time went on, people grew used to using paper money. In addition, economics began to realize that unlimited printing of paper money was a Bad Idea. The government refrains from printing extra money because everyone knows that inflation results. It’s a balancing act, however, which is why we have Alan Greenspan.
The Federal Reserve System (established under Wilson) is separate from the gold standard. I seem to recall the U.S. went off the gold standard under Roosevelt. The price of gold was set, but Nixon let the price fluctuate on the free market, since the value of the gold was kept artificially low.
“East is east and west is west and if you take cranberries and stew them like applesauce they taste much more like prunes than rhubarb does.” – Marx
Read “Sundials” in the new issue of Aboriginal Science Fiction. www.sff.net/people/rothman
In brief, the gold standard was set up because no one trusted paper money. As others pointed out, the temptation was to print as much as the stuff as you can, creating inflation and making it worthless. The U.S. had bad experiences with paper money during the Revolution and the Civil War, when they had to print money to pay their debts.
Paper money is based on trust. In order to create trust, the government hit upon the idea of backing their bills with the equivalent amount of gold or silver. In theory, you could redeem these gold or silver certificates for the metal itself. This allowed the government to use paper money and ensure that people had confidence they could use it to pay their debts.
As time went on, people grew used to using paper money. In addition, economics began to realize that unlimited printing of paper money was a Bad Idea. The government refrains from printing extra money because everyone knows that inflation results. It’s a balancing act, however, which is why we have Alan Greenspan.
The Federal Reserve System (established under Wilson) is separate from the gold standard. I seem to recall the U.S. went off the gold standard under Roosevelt. The price of gold was set, but Nixon let the price fluctuate on the free market, since the value of the gold was kept artificially low.
Now, of course, with credit so readily available, interest rates have a much larger effect on the economy than the price of gold.
“East is east and west is west and if you take cranberries and stew them like applesauce they taste much more like prunes than rhubarb does.” – Marx
Read “Sundials” in the new issue of Aboriginal Science Fiction. www.sff.net/people/rothman
Just to keep the discussion moving, here are some key moments in recent gold history:
** 1879 ** United States adopts de facto gold standard. Most other countries also did so around this time.
** 1900** United States formally adopts gold standard
** 1913** Federal Reserve System created - gold standard maintained
** WWI** United States maintains standard, but most of Europe abandons it, leading to currency fluctuations.
** Post WWI** Europe and Asian countries return to gold standard, mostly at devalued levels. UK retains dollar parity.
** Depression Years** Most countries again abandon gold standard, starting with UK in ‘31
** 1933** Roosevelt suspends convertibility of currency to gold, but standard remains for settlements.
** 1946** Bretton Woods agreement. Other currencies convert to US dollar on an “adjustable peg” basis. Dollar stays convertible to gold.
** 1971** United States abandons Bretton Woods and the gold standard.
Carry on.
Livin’ on Tums, Vitamin E and Rogaine
And, for what it’s worth, the gold standard came in in the 19th century as a way to avoid problems that happened to coins every time the price of silver went up or down compared to the price of gold. Britain decided to make only the gold coins worth what they were supposed to be, and reduced the intrinsic value of non-gold coins to below their nominal values.
John W. Kennedy
“Compact is becoming contract; man only earns and pays.”
– Charles Williams
And here are some more key moments in recent gold history:
1834 The Act of June 28, 1834 re-defines the U.S. dollar from 27.5 grains of 900-fine (90%) gold to 25.8 grains of 900-fine gold.
1934 Franklin D. Roosevelt re-defines the U.S. dollar from 25.8 grains of 900-fine gold to 15.375 grains of 900-fine gold. (Partly so he could start paying off the 20 billion dollar national debt in these new smaller “dollars”.)
Late 1960s or early 1970s The gold content of the U.S. dollar is reduced again, just before the country goes off the gold standard for good.
The truth, as always, is more complicated than that.
Free Silver!!!
Silver’s been imprisoned? Who knew?
P.S. Thanks, DSBryanEsq 
Livin’ on Tums, Vitamin E and Rogaine
Ah but you are forgetting paper money has value because people now think it does. Gold has value as people think it does? (Granted it’s an oversimplification it does have practical applications too. Filling teeth etc)
Lest we forget about the fairy tale of the greedy king. He tax and tax and tax the people. His subjects raised turnips and lived off them. But he didn’t care all the people had were turnips to eat. He taxed them and took thier gold till one day he had all the gold in the world.
So the people went off the gold standard and onto the turnip standard and now the king, who had no turnips, was the poorest man in his own kingdom.
I think using commodities as money is just less flexible than using fiat. Intrinsic value actually gets in the way of things. If we were on the gold standard, and dentists suddenly stopped using gold in fillings, it would create inflation (all other things being equal, of course). If suddenly everybody started eating gold, or getting gold-plated food processors or whatever, it would create deflation. Granted, it’s counterintuitive, but that’s the very problem with commodity-based money - too much else is going on for money to have an accurate value. If people have less demand for gold, the price of gold will drop, and if gold = money, the value of money falls --> inflation. (This is of course a theoretical example; gold’s intrinsic value has little influence upon its market value.)
Accurate value? A constant price for items of a given value. If the economy expands 10%, the money supply should expand 10%, no more, no less. It’s a lot to ask of turnip farmers…
This is a very interesting discussion, however there are 2 common misconceptions about gold. Firstly that it is an inflation hedge or a safe haven investment. The price of gold has been gradually declining for some time, at the beginning of 1998 it was near $288 per ounce, in August it was near $250. It has been affected much more by the announcements of central banks such as Switzerland and the UK as well as the IMF that they are selling their reserves, and by the German decision to revalue their gold reserves in order to make the Maastricht criteria for entry into the single currency than it ever was by the Asian, Latin American or Russian crisis, or the collapse of LTCM. Between August - October this year the price of gold went from $250 to a high of $325, and has come back down to $288 for the year end. This volatility was on the back of announcements of those central banks and the IMF that they are revising their selling schedules and may not sell nearly as much gold as they had anticipated. This very neatly underlines how the price of gold is not only driven by fundamental changes, such as the opening of new mines, but also theoretically it is open to manipulation, in turn underlining its main weakness as an anchor for a currency. It has been a long time since people fled into gold at the hint of a crisis, nowadays they are much more likely to go into short dated US Treasuries since, ironically, the good faith and credit of the US government has come to be more valued than the gold on which the currency was once based. Ummm, one common misconception.
Moonshine wrote:
Then, two sentences later, Moonshine wrote:
I’m sensing a contradiction here…
The truth, as always, is more complicated than that.
Read it again Tracer. Makes sense to me.
Does anyone recommend any well-written, easy to read books about how money works? I’ve been interested in this stuff since econ 101 but have to ever really pursued it much.
<giggle>
Cooper, if they knew how it worked, we wouldn’t have so much trouble fixing it.
When we finish this topic, let’s discuss tarriffs…
Sorry, what I had meant to say was that by August of 1999 the price of an ounce of gold has dropped to USD250. Since then it went up to USD325 and is now at USD288. I was trying to outline the gradual decline in the price of gold, not taking into account the recent and temporary jump in its price on the back of central bank news.