The gold standard links a nation's currency to gold. This system requires a nation to exchange its currency for a specific amount of gold. A country sets a gold price in the gold standard and buys and sells gold. The country's currency's value depends on the price. If the US sets the gold money price at $500 per ounce, one dollar would be worth 1/500th of an ounce.

Today, no nation uses the gold money. The UK abandoned it in 1931, and the US ended it in 1933, leaving it by 1973. However, fiat currency dominates. A government issues fiat money as legal tender but lacks the backing of gold. The value of fiat currency like the U.S. dollar or Nigerian naira is set by government mandate and market forces.

Historical Impact of the Gold Standard

President Herbert Hoover's 1933 speech praised gold as a reliable asset. He said, "We have gold because we cannot trust governments." This remark was crucial to American history before FDR signed the Emergency Banking Act. This act required citizens to exchange gold certificates, coins, and bullion for dollars at a turning point in the country's financial history.

This law was passed to prevent Great Depression-era gold depletion. However, gold believers remained unmoved. These "gold bugs," as they're called, believe gold can preserve wealth.

Gold's asset class journey is unique, especially given its impact on supply and demand. The rise and fall of gold provides valuable insights. Predicting gold's future requires understanding this decline.

Europe first used paper currency in the 16th century, primarily private debt notes. Gold currency and bullion remained vital to Europe's monetary system. The gold standard was implemented after paper money became more popular than gold in the 18th century.

Rise of Gold Standard

The gold standard converts paper currency into a fixed amount of gold. This means gold underpins currency value. The gold standard and paper money caused problems from 1696 to 1812.

The 1789 U.S. Constitution gave Congress exclusive coin production and value regulation authority. This action helped establish a standardized national currency, replacing the disparate foreign coins, mostly silver, that were legal tender then.

Silver and Gold

Initially, silver was more plentiful than gold, leading to the adoption of a bimetallic standard in 1792. The initial silver-to-gold ratio of 15:1 accurately reflected market values. However, post-1793, the value of silver declined, causing gold to vanish from circulation, as explained by Gresham's law.

The Coinage Act of 1834 addressed the situation amid significant political tension. Advocates of hard currency pushed for a ratio to reintroduce gold coins to eliminate small-denomination paper notes from the Bank of the United States. The 16:1 ratio, favoring gold, effectively established a de facto gold standard in the U.S.

Adoption of the Gold Standard Globally

By 1821, England was the first nation to adopt the gold standard officially. The 19th century's surge in global trade and discoveries supported the gold standard's longevity. As international trade imbalances were settled with gold, nations were motivated to accumulate gold reserves, which still exist today.

Germany's adoption of the gold standard in 1871 led to its international acceptance. By 1900, most developed countries had adopted it. Curiously, the US was one of the last countries to join because a powerful silver lobby opposed gold as the only monetary standard in the 19th century.

Gold standard peaks between 1871 and 1914. Australia, Canada, New Zealand, and India, which adopted the gold standard, benefited politically. The Great War began in 1914, however, bringing change.

The Demise of the Gold Standard

World War I changed political alliances significantly, increased international debts, and weakened government finances. The gold standard, while not entirely abandoned, faltered during the war. This exposed its limitations, undermining its confidence and highlighting its inability to adapt to varying economic conditions. The need for a more adaptable basis for the global economy became apparent.

Countries yearned for the gold money standard, but the gold supply dwindled as the global economy grew. Thus, the British pound sterling and U.S. dollar became international reserve currencies. Gold was concentrated in a few significant nations as smaller countries held these currencies instead of gold. US gold reserves are the largest at 8,133 tons.

The 1929 stock market crash exacerbated post-war global problems. Currency value misalignments, war debts, falling commodity prices, and overextended banks were common. To protect their gold reserves, nations raised interest rates to deter investors from buying gold. The global economy was already fragile, but these measures worsened it. In 1931, the UK quit the gold standard, leaving only the U.S. and France with significant gold holdings.

In 1934, the U.S. government revalued gold, devaluing the dollar and imposing a gold money monopoly. By converting gold to U.S. dollars and production, by 1939, all currencies could be covered by gold reserves.

Comparison of Gold and Dollar

Western powers drafted the Bretton Woods Agreement in the last stages of World War II, and impacted global currency markets until 1971. This system fixed the exchange rates for national currencies to the US dollar, redeemable into gold at a fixed rate. The gold-dollar relationship has been complex throughout history. A dollar depreciation usually raises gold prices, though there may be fluctuations.

After World War II, the US held 75% of global monetary gold, and the dollar was the only gold-backed currency. As war-torn nations were rebuilt and imports increased, America's gold reserves declined. In the late 1960s, inflationary pressures weakened the gold standard.

The Gold Standard Collapse

In 1968, the Gold Pool—a group of US and European nations—ceased selling gold on the London market, letting the market set its price. The goal was to synchronize gold's market value with its official exchange rate. However, debt monetization and rising foreign competition hurt America's balance of payments. Senator John F. Kennedy pledged not to devalue the dollar during his presidential campaign.

The Gold Pool was dissolved in 1968, and nations' actions led the US to end gold convertibility in 1971. The gold money standard ended in 1976 when the dollar stopped being linked to gold. Post-1971, approximately half of all mined gold was extracted.

Nixon's 1971 decision to end the dollar's convertibility into gold transformed the international currency market. The global financial system, heavily reliant on the U.S. dollar, transitioned into an era of fiat money.