The short answer to the question of when the US abandoned the Gold Standard is…1971.
Understanding the Gold Standard
The precious metal gold has long been recognized as a way to regulate and maintain a country’s economic system. When any economic unit is defined as a set amount of gold, that economic unit becomes extremely strong world-wide. The reason is because gold is desirable around the globe.
When the American dollar was backed by gold, any American currency could, in theory, be exchanged at a bank for its value in gold. This made the dollar one of the strongest currencies in the world.
The Beginning of the Gold Standard
The Gold Standard Act was passed in 1900. At this time, the value of all American currency was to be based on actual gold. In 1933, President Franklin D. Roosevelt banned the private ownership of gold, with the exception of jewelry.
In 1946, the Bretton Woods System was enacted. Under this system, there was a system of fixed exchange rates that allowed other governments to sell their gold to the United States. The price was set at an incredible $35 an ounce.
The end of the gold standard came in 1971, when President Richard Nixon ended this practice. All formal links between major world currencies and actual commodities were broken with this change.
Fiat money is defined as currency that has no value in and of itself, and is only valuable as a means of exchange, or as the “promise” of money. Supply and demand begins to set the value of the currency, rather than a solid, tangible asset. Prices begin to fluctuate based on the markets, potentially allowing serious problems with inflation.
Advantages and Disadvantages of the Gold Standard
When a country begins printing more money without having a basis for it, the value of that currency will decline. Using a gold standard prevents a country from printing more money, unless it has acquired more gold. When gold is the universal standard of currencies around the world, the foreign exchange market will be highly stable.
Unfortunately, this stability in currency value created by a gold standard can also be a drawback. When gold is securing the value of currency, then changing circumstances in countries can not be reflected in their currency value. Most of the power of the Federal Reserve would be lost if we were to return to a gold standard.
The End of the Gold Standard
The gold standard remained in place until 1971. In 1970, the growing cost of the Vietnam war and a trade deficit caused the United States to make the decision to print more money. Other countries began to question America’s ability to actually cover all the American currency in circulation with gold.
The first county to actually leave the Bretton Woold system was West Germany. Seeing this move, and fearing that American currency they had invested in would lose value, other countries began demanding that the Unites States turn over gold in exchange for our currency.
President Nixon made the decision to take the country off the gold standard to prevent an economic meltdown.
A Call to Return to the Gold Standard?
Times change and some people are calling for a return to the gold standard. One of the biggest challenges facing the US currently is the prospect of high inflation rates.
Being on a gold standard would limit the amount of money that is being printed, it would limit inflation, and it would stabilize the value of our currency. The hope is that returning to a gold standard would help the country regain some of its power and strength.