What Is The Gold Standard? Gold Standard Definition

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Chances are you have heard some application of the term “gold standard” in your life. Whether applied to a high end consumer product, a superb piece of entertainment or anything else, you likely understand that it is high praise. However, you may not be familiar with the Gold Standard definition and the legacy it left. Rather than just a phrase used to denote high praise, the Gold Standard was an influential economic principle that dictated the functioning of the US economy for many generations.

What is the Gold Standard?

As you may have guessed, the term does originally refer literally to gold. At its very basic sense, the idea of the Gold Standard is that money should be backed by a commodity of material value, usually gold. In a gold standard driven system, the value of the currency and therefore the state of the economy was beholden to the nation’s federal gold supply. With the Gold Standard, a country cannot issue any new money without matching that money with its value in gold. While this method is a great way to prevent rampant devaluation and other financial backslides, it prevents the creation of new currency.

If this is hard to understand, it may be helpful to think of it in terms of a similar system that is currently in use. In the case of Bitcoin and some other cryptocurrencies, the idea is that there is a finite supply of the unit of currency, to prevent a rapid devaluing of the money through overprinting. If this is still confusing, understand that in very basic terms, one can think of the world economy as a poker game, and each player as a national economy. Just as your chips are a stand in for the money you wager, the Gold is a placeholder for the government’s money. In this poker game, though money is exchanged in most every hand of cards, it does not physically pass between hands during the game, but is instead represented by the poker chips, which assume a certain monetary value. In a system dictated by the Gold Standard, the money in your pocket is the paper while your chips are the gold.

What Went Wrong?

Though we no longer use the Gold Standard in terms of our national currency, our economy was dictated by this system for many decades before i out it fell out of favor. While the US economy ran under the auspices of the Gold Standard with relative success starting in 1879, several events of the twentieth century would advocate and eventually lead to its decline and end. One of the first major public attacks on the system came in the form of a speech by renowned American political figure William Jennings Bryan. In his now famous “Cross of Gold” speech, Bryan implored the public of the need to update the tired old system of the Gold Standard. However, rather than eliminate the process of gold backing, Bryan thought it was prudent to also use silver to back money. While this insight caused people to begin to question and define the limits of backing money with a finite resource, it failed to fully grasp the limited nature of such elements. Though adding silver to the arsenal of value to back the money would allow us to print more money, the “bimetal” system still ignored that the silver was also a finite and exhaustible resource. Though the objective of the Gold Standard system to prevent rampant overprinting of money was noble and important, the needs of the monetary system would come to outpace the supply of gold necessary to maintain their eternal link. Rather than expanding the scope of the system or kicking the proverbial can down the road, later reformers and leaders would advocate for a full end to the Gold Standard.

The next time the practicality of the Gold Standard came into question was under Franklin Delano Roosevelt. The parameters of the gold standard had to be amended under Roosevelt due to the Great Depression. Because the economy had taken such a horrible turn and destroyed stock assets, many people began to hang on to things of material value, especially gold and other precious metals. Because the Gold Standard relied on the Reserve’s dealings in gold, the large scale hoarding of gold destroyed this cycle of commerce. Buying a great deal of gold from the wealthy, Roosevelt’s government used the loaned gold to prop up the dollar.

What Was the Last Straw?

Though the effects of the Great Depression certainly uncovered many of the flaws and limits of the Gold Standard system, the government would adhere to the practice until 1971. In that year, then president Nixon was faced with financial troubles. Because the Gold Standard dictated that more money equaled more gold, Nixon and his advisors realized that the system would prevent them from printing more currency. By ending the Gold Standard, Richard Nixon severed the direct relationship between the nation’s money supply and its last tangible material representation. In a system not bound by the Gold Standard, economies are far more prone to rapid and extreme inflation, owing to their lack of protection against such devaluations.

Did We Make a Huge Mistake?

Though Nixon’s ending of the Gold Standard eliminated the issues around printing more currency, the effects of this policy were inevitably destructive to the American economy. Though printing more currency literally puts more money in circulation, it will always eventually damage the overall value of the dollar. Because the Gold Standard effectively kept the overprinting of currency to a minimum, its elimination has allowed successive generations of lawmakers to print additional money in times of economic strife, creating an effect that is difficult, if not impossible to reverse. Without the building blocks of the Gold Standard, the supply of money in the country is no longer the organic result of the fluctuations in gold. Consequently, it became substantially harder to understand the the terms and relationships between the economy and the US dollar on a tangible level. Though Nixon’s intent was to introduce a level of economic regulation that would prevent recessions and other downturns, the system he has set in place has been subject to abuse and mismanagement over many administrations.

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