Gold standard - Business in United States of America

Definition: Valuation of national currency by equating a specific monetary unit with a specific amount of gold
Significance: Adoption of the gold standard stabilized international currency exchange rates and enabled free trade, thereby aiding the growth of American business during the late nineteenth and early twentieth centuries. However, as individual nations assumed greater control over monetary policy, the standard gradually fell into disuse and was discontinued.
The gold standard was both a means of regulating the currency value within an individual nation and a means of regulating international currency exchange rates. Historically, gold has been considered a reliable metal for use as currency because its supply has remained relatively stable over time. The gold standard came into international use during the late nineteenth century as the growth of nations and advances in transportation and communications rendered trade increasingly global in nature.
In the nineteenth century, the United States employed a bimetallic currency system based on gold and silver. American industry, aided by stable gold based international exchange rates that made free trade between nations possible, prospered during the latter half of the century. However, as European nations turned away from silver and new discoveries of the metal in the United States created an oversupply, farmers and small-business interests suffered from deflation. Farmers and Populists who favored the increased coinage of silver to reverse deflation clashed with supporters of a pure gold standard. The supporters of a gold standard prevailed at the turn of the century, with the passage of the Gold Standard Act of 1900, which officially established gold as the only precious metal for which paper money could be redeemed in the United States.
World War I and its aftermath led to currency inflation in Europe, as nations struggled to finance their war efforts and to pay debts and reparations, leading to widespread suspension of the gold standard. When European nations returned to the gold standard during the 1920’s, severe deflation resulted, contributing to the economic collapse that led to the Great Depression of the 1930’s. Europe abandoned the gold standard during the early 1930’s, and in 1933, president Franklin D. Roosevelt followed suit by effectively suspending the gold standard in the United States.
The gold standard remained in effect in modified form after World War II with the 1946 adoption of the Bretton Woods Agreement, under which the U.S. dollar became the preferred means of settling international debts, and the U.S. government promised to redeem dollars at a fixed rate of $35 per ounce. Inflation produced by the economic boom of the 1950’s and 1960’s combined with decreased national gold reserves and debts incurred as a result of the Vietnam War prompted the United States to abandon the gold standard in 1971. By then, most nations had moved to a fiat standard (not backed by any physical asset) of currency, in which the value of money was established strictly by government policy and global market forces.

Further Reading
Bayoumi, Tamim, et al. Modern Perspectives on the Gold Standard. New York: Cambridge University Press, 2008.
Bordo, Michael D., ed. Money, History, and International Finance. Chicago: University of Chicago Press, 1989.
Lewis, Nathan. Gold: The Once and Future Money. New York: John Wiley & Sons, 2007.
See also: American Bimetallic League national convention; Black Friday; Black Hills gold rush; California gold rush; Coin’s Financial School; “Cross of Gold” speech; Fort Knox; Klondike gold rush.

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