Dear Reader,
Remember the good old days of the gold standard? The days when a dollar in your pocket was backed by a shiny bar of gold sitting in a vault somewhere? Me either, but it sounds like a solid deal, right? After all, gold is tangible, it's valuable, and it’s been trusted for millennia. But, despite all that history, the U.S. decided to part ways with this glittering relationship back in the 20th century.
So why did the U.S. say goodbye to the gold standard? Well, let's dive into the history and the key arguments that convinced everyone it was time to break up with gold.
A Quick Flashback: What Was the Gold Standard, Anyway?
Before we get into why we left the gold standard, let’s quickly understand what it was. The gold standard was a monetary system where a country’s currency had a value directly linked to gold.
In simpler terms, you could technically exchange your dollars for a fixed amount of gold.
For the U.S., this system was fully in place by the 1800s and really helped stabilize the currency and build trust. Gold equals value, and that sounds pretty safe and reliable, right? Well, yes and no.
The Big Break: The Historical Context
The early 20th century was a bit of a roller coaster. Think World War I, the Great Depression, World War II — economic crises galore. And through these crises, the rigid structure of the gold standard started looking less and less appealing to policymakers.
The pressure peaked in 1933 when President Franklin D. Roosevelt suspended gold convertibility for Americans to combat the Great Depression. But the final nail in the coffin came in 1971 when President Richard Nixon pulled the plug on the system altogether. No more trading dollars for gold.
So why did this happen? What arguments made the gold standard go from hero to zero in the eyes of governments? "I'm About to Hand You ALL of Our Current and
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Argument 1: It Limited Economic Flexibility
One of the biggest reasons the U.S. ditched the gold standard was that it tied the government’s hands when it came to monetary policy. Simply put, it limited the amount of money the government could print.
Under the gold standard, the amount of money in circulation was directly linked to the amount of gold the U.S. held in its reserves. This meant that when the economy needed a little extra help (like printing more money to stimulate growth), the government couldn’t just create more dollars without having the gold to back it up.
In times of economic crisis — say, the Great Depression — this presented a problem for a government determined to stimulate growth. The U.S. felt it needed more money in circulation to get things moving again, but the gold standard kept that from happening.
And the argument that it was like trying to drive a car with a locked steering wheel — no flexibility, no ability to adapt to changing conditions — was born
Argument 2: It Created Trade Imbalances
Another major issue opponents had with the gold standard was the way it affected global trade…
Since currencies were pegged to gold, countries that exported more than they imported (i.e., countries that had trade surpluses) would accumulate gold. And countries with trade deficits would lose gold reserves.
This meant that countries with trade deficits, like the U.S. in the post-World War II era, faced a dwindling gold supply, which threatened their ability to back their currency. And this is where the infamous "Triffin dilemma" comes into play…
The U.S., as the world’s dominant economic power and reserve currency, had to provide dollars to the world for international trade and investment. But doing so meant running trade deficits and losing gold reserves.
It was a Catch-22 situation: Keep the gold standard and risk losing gold reserves, or print more money to fuel the global economy and abandon the gold standard.
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Argument 3: The Gold Supply Is Limited (And Unevenly Distributed)
The third argument against sticking to the gold standard stems from part of what makes gold valuable. You see, gold is valuable partly because it’s scarce. But this scarcity became viewed as a problem for a growing global economy.
Opponents proposed that there simply wasn’t enough gold being mined to keep up with the needs of modern economies. As the economy expanded, the fixed amount of gold limited the amount of money that could be in circulation, causing deflation (falling prices) and stifling economic growth.
On top of that, not every country has gold mines in its backyard. So the distribution of gold around the world is far from even.
And antagonists said that countries that were “gold-poor” were at a huge disadvantage under the gold standard. This unequal distribution made the system inherently unfair and unsustainable as economies grew more interconnected.
Argument 4: Inflation Control? Not So Much
Now, here’s an argument against the gold standard that you really can’t argue with if you’re talking traditional gold...
Proponents of the gold standard often argue that it helps keep inflation in check because you can't just print more money willy-nilly. However, in practice, the gold standard didn’t do such a great job of preventing inflation.
During periods of gold discovery, when large amounts of gold entered the market, inflation spiked as the money supply increased. Conversely, when gold supplies dwindled, deflation occurred, making debt more expensive and stalling economic growth.
On top of that, smelting, transporting, and storing gold all come with costs. And those costs are an inflationary pressure on the gold being smelted, transported, and vaulted away.
So while the gold standard theoretically imposed discipline, in reality, it created swings in price levels that were hard to control. And it actually had built-in inflationary pressures itself. Uranium Is Surging: Where to Invest Now
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The Final Blow: The Nixon Shock
By the late 1960s, it became clear to the powers that be that either government spending or the gold standard was unsustainable. One had to go…
The U.S. was running large budget deficits (thanks, Vietnam War and domestic spending) and printing more dollars than it had gold to back up. Countries like France even started demanding gold in exchange for their dollars, and U.S. gold reserves were quickly draining.
So in 1971, President Nixon made the decision to cut the tie between the dollar and gold altogether. This move, known as the “Nixon shock,” officially ended the gold standard and ushered in the era of fiat currency — money that’s backed by the government's declaration of its value rather than a physical commodity.
So... What Now?
Since then, the U.S. and most of the world have operated on fiat currency, where the value of money is based on trust in governments and central banks rather than shiny metal. But the thing is that these days, trust in governments and fiat currencies is just slightly above trust in the media.
In fact, it’s gotten so bad that some folks think we should return to the gold standard.
And thanks to technological developments between the 1970s and today, gold could now keep pace with the fast-moving global economy. You see, an entirely new way of assessing its value could rebut every single argument used to get the world to ditch the gold standard in the first place.
But that’s a conversation for another day…
To your wealth,
Jason Williams
@TheReal_JayDubs
Angel Research on Youtube
After graduating Cum Laude in finance and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team responsible for billions of dollars in daily trading. Jason left Wall Street to found his own investment office and now shares the strategies he used and the network he built with you. Jason is the founder of Main Street Ventures, a pre-IPO investment newsletter; the founder of Future Giants, a nano cap investing service; and authors The Wealth Advisory income stock newsletter. He is also the managing editor of Wealth Daily. To learn more about Jason, click here.
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