Group Activity #1

February 02, 2023

Aldawood, Aliah | Bugna, Leigh Christian | Bumanglag, Yman Gio | Paurnia, Angelica
BSN - 4E

Gold Standard

A monetary system known as the "gold standard" is one in which the value of a
nation's currency is linked to the price of gold. In a monetary system based on the gold
standard, a predetermined sum of paper money can be exchanged for a predetermined
quantity of gold. Countries that abide by the gold standard cannot raise the total amount
of paper currency in circulation without simultaneously raising their total gold reserves.

After the master of the mint, Sir Isaac Newton, overpriced the guinea in terms of
silver, England adopted a de facto gold standard in 1717, and in 1819 they formally
adopted the gold standard as their official monetary standard. In the 1870s, a number of
other major countries switched to using gold as their standard currency. The years
between 1880 and 1914 are commonly referred to as the "classical gold standard."
During that period, most countries stuck (to varying degrees) to gold as their currency of
choice. Additionally, during this time, the economy expanded at an unprecedented rate,
and trade in goods, labor, and capital were relatively unrestricted. Although the United
States was formally on a bimetallic standard (gold and silver), the country switched to a
gold standard de facto in 1834 and de jure in 1900 when the Gold Standard Act was
passed by Congress. The United States government established a ceiling on the price
of gold at $20.67 per ounce in 1834, which remained at that level until 1933.

However, during World War I, many European countries decided to temporarily

abandon the gold standard so that they could print more money and contribute more to
the war effort. The first decade of the 1920s, also known as the Roaring Twenties, saw
a significant uptick in economic activity in the United States as a direct result of the
post-war recovery in the construction and automobile industries. In 1928, the Federal
Reserve decided to raise interest rates as part of its fight against inflation. Furthermore,
European nations that had borrowed money from the United States during World War I
had difficulty repaying their debts at the end of the war. As a direct consequence, the
demand for products exported by the United States decreased.

The combination of an economy slowing down, the stock market crash that
occurred in 1929, and a wave of bank failures that occurred in 1930 and 1931 led to
crippling levels of deflation. As time went on, the terrified populace started stockpiling
gold. Because they were tied to the gold standard, the United States and other nations
were unable to increase their money supplies in an effort to stimulate the economy. In
1931, Great Britain was the first to abandon its reliance on the gold standard. Soon
after, numerous other nations followed.

Moreover, the United States did not give up on gold for an additional two years,
which made the suffering caused by the Great Depression even worse. When President
Franklin D. Roosevelt signed the Gold Reserve Act in 1934, he removed the United
States from the gold standard. Following the passage of this bill, it became unlawful for
members of the general public to possess the majority of gold's forms. Thus, paper
currency was substituted for people's gold coins, gold bullion, and gold certificates as
part of a mandated monetary reform.

Consequently, the United States increased the quantity of gold reserves held at
the United States Bullion Depository in Fort Knox as a result of an exchange in which
gold was traded for paper currency. The price of gold was increased by the government
to $35 per ounce, which made it possible for the Federal Reserve to increase the overall
amount of money in circulation. The economy started to improve on its own, but it would
take the United States the better part of the 1930s to emerge from the depths of the
Great Depression and reach its pre-depression level of prosperity.
 References
Bordo, M. D. (n.d.). Gold Standard. Econlib. Retrieved from https://www.econlib.
org/library/Enc/GoldStandard.html
Boyle, M. J. (n.d.). What Is the Gold Standard? Advantages, Alternatives, and History.
Investopedia. Retrieved from https://www.investopedia.com/ask/answers/09/
gold-standard.asp
Konkel, L. (2018, May 8). How Did the Gold Standard Contribute to the Great
Depression? Retrieved from https://www.history.com/news/how-did-the-gold-
standard-contribute-to-the-great-depression