Why did the US abandon the Gold Standard?

What was the gold standard, what was the problem and what do we use now?

Currency is a factor that is heavily influenced by and also influences trade – when countries, or companies within those countries, exchange goods, they do not exchange them for other goods but rather a currency, which is fiat money in today’s modern society. Still, this could have been gold, bronze, or even sticks for ancient civilisations. Even with the currency of money, there are different forms – there was the previous system that matched the value of the US dollar to a certain weight of gold, and other currencies were tied to the value of the dollar. The gold standard was set at $35 per ounce of gold, and other countries and their currencies were set a fixed exchange rate according to the value of the US dollar and, in turn, the value of gold. This was simple to understand and allowed for more straightforward trade between countries. Instead of bartering goods, such as 50 iPhones for 1 Mercedes A-Class, they could instead exchange their currency for the other country’s local currency and trade with each other using them.

However, when the Great Depression hit the global economy, many people decided to exchange their dollars for gold, as gold had a set value. In contrast, the US dollar and most other currencies were depreciating in value due to a worldwide recession. To prevent the US gold reserves from depleting, President Franklin D. Roosevelt, governing America during the Great Depression in 1933, cut off the US dollar from the gold standard while allowing foreign governments to exchange dollars for gold[1]. This also allowed the US to pump money into the economy by printing more to combat the spiralling deflation. This would let interest rates fall and encourage more people to spend and boost economic growth rather than hold their savings, believing they will grow in value. This technique worked, and the United States slowly began to climb out of the crater left by the Great Depression. Still, then a new problem was introduced – ‘dollar-flush’ foreigners began cashing in their American currency for gold. This threatened the federal reserve of gold again, and so President Richard Nixon abruptly abandoned the gold standard and shut it down in 1971.

Since then, most nations have moved to so-called ‘fiat currency’, a term describing ‘currency that is used because of a government’s order, or fiat, that the currency must be accepted as a means of payment.’[2] For example, in the United States, it is the dollar; in the UK, it is the pound sterling. For most European countries, it is the euro. They can be easily exchanged and are often traded by investors and speculators on the foreign exchange market, or ‘forex’ as it is more commonly known. Fiat currencies are individual and depend on the economic development of the country or countries it is used in, so one currency falling in value does not directly result in any others depreciating either, which separates fiat currency from the gold standard. However, this may not be clear from a brief glance as the actual root of the depreciation may affect the other currencies, giving the impression that they might affect each other directly.

[1] Source: https://www.mentalfloss.com/article/12715/why-did-us-abandon-gold-standard

[2] Definition from https://www.investopedia.com/ask/answers/09/gold-standard.asp


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