Here’s Why the U.S. No Longer Follows a Gold Standard

This post, originally published Nov. 8, 2017, has been updated with additional information.

Every few years, the idea of the gold standard becomes a hot topic. And why not? Gold is shiny and valuable, and people like it.

What Is the Gold Standard?

A gold standard means the value of a country’s currency is linked to a specified amount of gold. Under the gold standard, governments needed to be ready and willing to buy and sell gold to anyone at the set price. However, countries had the ability to change their gold-to-money ratio, or how much money they would exchange for an ounce of gold, as noted in a Page One Economics essay about the gold standard.

The Gold Standard’s History

How long can you hold the gold? Visit the St. Louis Fed’s Economy Museum to see if you can lift a 28-pound authentic gold bar.

The gold standard has roots in ancient history: Gold was used to fund trade and finance wars. What would people accept in exchange for their labor or goods? They wanted something tangible and of value. Gold was a good fit because of its limited supply and, frankly, because it was pretty. So, new and forming countries relied on the shiny stuff.

The U.S. was no different. Commercial banks and Federal Reserve banks had a gold reserve requirement. They had to keep reserves of gold in their vaults equal to a fraction of the money they issued.

“For every Federal Reserve dollar that was issued, the Reserve Bank had to have 40 cents worth of gold in its vault downstairs in the basement,” explained St. Louis Fed economist David Wheelock.

And then the Great Depression hit. People hoarded gold instead of depositing it in banks, which created an international gold shortage. Countries around the world basically ran out of supply and were forced off the gold standard.

When Did the U.S. Stop Using the Gold Standard?

The U.S. came off the gold standard for domestic transactions in 1933 under President Franklin Roosevelt and ended international convertibility of the dollar to gold in 1971 under President Richard Nixon, effectively ending the gold standard in the U.S.

The U.S. switched to a fiat money system. Fiat money has no value of its own and doesn’t represent anything of value, such as gold. But the government stipulates that the paper money is legal tender for carrying out transactions or paying taxes, as noted in the Page One Economics essay.

What Are Disadvantages of the Gold Standard?

There are significant problems with tying currency to the gold supply:

• It doesn’t guarantee financial or economic stability.
• It’s costly and environmentally damaging to mine.
• The supply of gold is not fixed.

“The U.S. mines a lot of gold, but we’re not the biggest producer,” Wheelock said. “The bigger suppliers of gold would have more control over our monetary policy, and there’s no reason to have it because we can get the advantages of the gold standard and avoid the disadvantages without being on a gold standard.”

To learn more, check out these Timely Topics videos about the gold standard and a short article about the gold standard and price inflation.

Rachel Dods contributed updates to this blog post.