The opinions expressed are solely those of the presenters and do not reflect the opinions of the Federal Reserve Bank of Dallas or the Federal
Reserve System.

• The unit of currency is backed or fixed to a certain amount of gold (or the price of a unit of gold is set).
• The nation will buy and sell gold freely at the predetermined price (the mint price).

• An increase in the amount of monetary gold
can lead to an increase in the money supply.
If everything else holds constant, as the supply of money rises, the price level increases.
• A decrease in the amount of monetary gold
can lead to an decrease in the money supply.
If everything else holds constant, as the supply of money falls, the price level decreases.

• Multiple forms
– Pure coin standard
– Mixed standard
– Bullion standard
– Gold exchange standard
• Varied across time and among nations

• Gold standard guaranteed the value of currency for international trade
• Risk of loss from trade with unknown or unstable currencies minimized
• Domestic vs. International role of money

• Coinage Act of 1792 established Mint and created a bimetallic (gold/silver) standard
• Coinage Act of 1834 increased mint price of gold and created a de facto gold standard.
• Legal Tender Act of 1862 removed the U.S. from the gold standard.

• Resumption Act of 1875 requires that U.S. currency be redeemed for coin. It puts the
U.S. on a de facto gold standard.
• Gold Standard Act of 1900 formalized the adoption.

• Classical gold standard
• Interwar period
• Bretton Woods
• After the gold standard…post Bretton Woods

• 1880 – 1914
• 59 countries total with four core countries
– U.K.
– U.S.
– France
– Germany
• Unprecedented global economic growth – first era of globalization

• Fixed exchange rates based on the price of gold
• Free movement of gold between countries
• National policies that encouraged the international flow of gold to follow levels of economic activity
• Gold standard was priority over domestic economic concerns

• Classical economic thought
– Economies tended toward full employment
– Government intervention was unnecessary or irrelevant

• Substantial deflation following Civil War was required to return to gold.
• Industrial Revolution concentrates wealth in urban areas.
• Discord between eastern capitalists and western farmers gave rise to populism.
– William Jennings Bryan and the Cross of Gold speech
– Bimetallic standard would allow inflation

7
6
5
4
10
9
8
3
2
1
0
1890 1892 1894 1896 1898 1900 1902 1904 1906 1908 1910 1912 1914
Historical Statistics of the United States Millennial Edition Online
Table Ba470-477 – Labor force, employment, and unemployment: 1890—1990 http://hsus.cambridge.org/HSUSWeb/toc/tableToc.do?id=Ba470-477

6,00%
4,00%
2,00%
0,00%
-2,00%
-4,00%
-6,00%
-8,00%
-10,00%
-12,00%
FRB Minneapolis CPI (Estimate) http://www.minneapolisfed.org/community_education/teacher/calc/hist1800.cfm

• Bank panics occurred in 1873, 1884, 1890,
1893 and 1907.

• Federal Reserve Act of 1913
• Specific concern – interest rate spikes caused by liquidity crises, banking panics and seasonality
• Federal Reserve’s mandate – provide liquidity and stabilize interest rates (not price stability)

• Countries needed to finance deficit spending on the war effort by selling bonds (e.g. Liberty
Bonds)
• To protect gold reserves, core countries suspended redemption and limited exports of gold

• U.S. deficits financed through the sale of war bonds (Liberty Bonds)
• Excess gold reserves allowed increases in the money supply and low interest rates
• U.S. price level doubled during WWI

• After the war, the Federal Reserve raised interest rates creating deflation and unemployment
• Mint price of gold restored in 1922
• Sterilization of gold flows created price stability for U.S. during 1920’s

• England returned to the gold standard in 1920
• Deflationary monetary policy cost the U.K. over one million jobs

• To curb Wall Street speculation, the Federal
Reserve raised rates at the end of the 1920’s.
• Worsening economic conditions worldwide created a domino effect of speculative currency attacks.

• May 1931 – Run on Austria’s largest commercial bank.
• July 1931 – After the collapse of an important
German bank, Germany adopts exchange controls.
• Sept. 1931 – Redemptions of the pound sterling for gold prompt the U.K. to suspend convertibility.

• U.K.’s departure from the gold standard led to speculative attacks on the U.S. dollar.
• Bank withdrawals and gold redemptions caused bank panics and failures.
• Faced with supporting the banking system or protecting the dollar, the Federal Reserve raised rates to secure the gold reserves.

• President Roosevelt declares a bank holiday to stabilize banking system.
• Presidential Order 6102 (1933) prohibits private holdings of gold coin, gold bullion and gold certificates.
• Gold Reserve Act of 1934
– All monetary gold owned by the government
– Only Federal Reserve Banks allowed to hold gold certificates

• Nations left the gold standard in groups
– U.K., Japan and Scandinavian nations (1931)
– U.S. and Italy (1932-33)
– France, Poland, Belgium and Switzerland (1935-
36)
• Evidence shows that an early departure from the gold standard hastened a nation’s economic recovery.

20,00%
15,00%
10,00%
5,00%
0,00%
-5,00%
-10,00%
-15,00%
Consumer Price Index for All Urban Consumers: All Items
U.S. Department of Labor: Bureau of Labor Statistics www.bls.gov

• Sought to blend the policy of fixed exchange rates of the gold standard with the flexibility to respond to domestic economic conditions
• International Monetary Fund coordinated adherence to the accord
• Member countries required to peg their currency to gold or to the U.S. dollar

• Committed to exchange dollars for gold
– Allowed other central banks to hold reserves in dollars, rather than gold
• Pressure on this commitment
– U.S. balance-of-payments deficit led to large dollar reserves in other countries
– Inflationary monetary and fiscal policies in U.S.
– U.S. inflation devalued dollar reserves around the world.

• 1960s – countries largely sterilized dollar inflows
• 1971 – international demand to convert dollars to gold peaked and Nixon suspended convertibility to protect U.S. gold reserves
• 1973 – formal end of Bretton Woods

• Exchange rates are no longer fixed (floating).
• Monetary policy seeks to achieve national economic goals.
• Monetary authorities must maintain price stability without the arbitrary constraint of a gold standard.

A Policy Dilemma:
The Mundell – Fleming Model
Independent monetary policy
Free capital flows
Fixed exchange rates

“Money and gold have no use or value in themselves…in short, our wealth lies neither in vaults at Fort Knox nor on the ledgers of our banks. Rather, it lies all around us, in what we have so prodigiously produced in the past and what we are capable of producing in the future.”
Peter L. Bernstein

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