Why did we abandon the gold standard?
In: Economics
The gold standard was abandoned in large part because of the restrictions it places on an economy and (perhaps more relevantly) Government to borrow and spend money. Under the gold standard, you can only have as much money as you have gold. You can adjust the ratio, ie your unit of currency is now worth less gold per unit, but you are still very much limited. During the World Wars countries found themselves needing to spend A LOT of money in a hurry and the need to have gold for that money was too limiting. Countries simply couldn’t bring enough gold to hand to back the amount of debt and currency they needed to move… so they stopped.
Post wars there was an effort to get back onto the gold standard but the benefits of a fully fiat (ie not back by anything but faith / credit) currency were being felt. Countries could manage their currency and economy regardless of the amount of gold or silver they possessed and the world was just… carrying on. At this point there is little incentive to go back that doesn’t come with it’s own downsides.
Estimates suggest that the *total amount of all gold mined by humans ever* is worth around $13.7 Trillion in today’s money or about 2/3rds the size of the US Economy *on it’s own*. So either gold needs to have a massively increased value, or we need to somehow shrink the size of the global economy by an order of magnitude.
It limits the government’s ability to enact policies that can reduce severity of recessions/economic downturns. Silly to base value of currency on a pile of shiny metal sitting in a warehouse even as technology, etc. rapidly grew the economic output.
Because gold only has the value we agree it has, and money is exactly the same way. Being on the gold standard was not really different from the system we have now, it just involved extra steps that made it harder for countries to participate in international trade and manage their economies.
Other people have given good explanations of the differences between being on and off the gold standard, but I think it’s worth pointing out that there were multiple periods in US history where currency was pegged to a tangible asset (usually gold). It’s not like BC and AD where there is a fixed before and after.
Imagine you have a country with 30 million people and the economy is supported by 30 million gold dollars. Works great.
Now fast forward 100 years. You have a country with 300 million people and an economy 10x larger supported by 30 million gold dollars. At this point one gold dollar represents 10x as much economic power than one gold dollar did 100 years ago. A house that was bought for 100,000 gold dollars is now worth … 10,000 gold dollars. A gallon of milk that was 5 gold dollars now is 1/2 gold dollar. You can see the value of one gold dollar is 10x as much now than before, so each item costs the same in the underlying unit of “economic activity”.
When money becomes more valuable over time, this is called “deflation”.
If my gold dollar is going to buy more tomorrow than it does today, then I want to save that gold dollar. I won’t buy anything today; I won’t hire employees because I want to pay wages tomorrow, not today. I don’t want to take out debts because the 20 gold dollars I owe now will be a larger debt to pay tomorrow. The entire economy screeches to a halt because no one wants to spend gold dollars. The result is an economic crash and a depression.
This happened ALL THE TIME under the gold standard. The only way to fix this is to issue more dollars to match (or even better, slightly exceed) the growth of the economy overall. This requires that dollars are not restricted by the amount of a finite resource. Once everyone realized this, the gold standard was abandoned.
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In my understanding i think the gold standard has limits on economic growth and expansion. holding onto the gold standard will create deflationary problems on your currency. This basically means invesotrs and consumers would end up holding on to the currency for future use instead of spending.
Typically you want your currency to inflate by 2-3% each year for a healthy growth.
its also important to note gold standard is also a form of Fiat currency. Instead of being pegged to CPI its pegged to a value of gold.
a different way of thinking about it without thinking about money at all is this: if the government has the people, material, and experience to do something that will generate wealth (say, building a mine, or a factory), it’s silly to artificially limit that simply because you don’t have enough of an arbitrary metal. once governments realized that, the gold standard was over. the quote from some economist was ‘anything we can *actually* do, we can afford.’ meaning that it doesn’t really matter if there’s no gold. as long as you can get the workers fed and housed, the wealth will be generated as a byproduct of whatever work your society has them doing. markets and analysts will arise as a byproduct to assess the credibility of things so that effort isn’t wasted, and everything is credited against the valuation of potential wealth production rather than the arbitrary value of a corrosion-resistant metal.
ofc this is all in a world where there was essentially unlimited wealth to be exploited with this system, and new tech to multiply those gains. now, toward the end stages of increasing productivity, there are a lot fewer exploitable wealth pools. one of the reasons that things seem to be changing so much, so quickly
edit: fucked up the quote. the economist was Keynes in 1942: https://jwmason.org/slackwire/keynes-quote-of-day-2/
Countries get bigger, economies get bigger, there are more people: but there’s only so much gold. So you need something else to use as money.
Historically, gold standards were often abandoned because the rulers wanted the freedom to debate their money to fund a war or another huge political project.
It’s no accident that the Federal Reserve was born right before the US entered WWI and Roosevelt criminalized holding gold right before the US entered WWII. Nixon fully severed the USD tie to gold because the US government was printing money, debasing the dollar, and other countries were starting to demand gold for their US dollars.
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