The Gold Standard in the U.S. - Federal Reserve Bank of Dallas

The Gold Standard in the U.S.
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.
Principles of a Gold Standard
• 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).
Link between Money Supply and Gold
• 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.
Implementation of a Gold Standard
• Multiple forms
– Pure coin standard
– Mixed standard
– Bullion standard
– Gold exchange standard
• Varied across time and among nations
Gold and Trade
• 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
U.S. Legislation
• 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.
U.S. Legislation
• 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
Historical Periods
Classical gold standard
Interwar period
Bretton Woods
After the gold standard…post Bretton Woods
Classical Gold Standard
• 1880 – 1914
• 59 countries total with four core countries
– U.K.
– U.S.
– France
– Germany
• Unprecedented global economic growth – first
era of globalization
Theoretical Principles of Gold Standard
• Fixed exchange rates based on the price of
• 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 Gold Standard
• Classical economic thought
– Economies tended toward full employment
– Government intervention was unnecessary or
Classical Gold Standard in U.S.
• 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
– Bimetallic standard would allow inflation
Unemployment in U.S.
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
Change in Price Level in U.S.
FRB Minneapolis CPI (Estimate)
Financial Sector Instability
• Bank panics occurred in 1873, 1884, 1890,
1893 and 1907.
U.S. Congress Responds to Instability
• Federal Reserve Act of 1913
• Specific concern – interest rate spikes caused
by liquidity crises, banking panics and
• Federal Reserve’s mandate – provide liquidity
and stabilize interest rates (not price stability)
World War I
• Countries needed to finance deficit spending
on the war effort by selling bonds (e.g. Liberty
• To protect gold reserves, core countries
suspended redemption and limited exports of
World War I in U.S.
• 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
Interwar Period in U.S.
• After the war, the Federal Reserve raised
interest rates creating deflation and
• Mint price of gold restored in 1922
• Sterilization of gold flows created price
stability for U.S. during 1920’s
Interwar Period in U.K.
• England returned to the gold standard in 1920
• Deflationary monetary policy cost the U.K.
over one million jobs
Great Depression
• 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.
Great Depression
• May 1931 – Run on Austria’s largest
commercial bank.
• July 1931 – After the collapse of an important
German bank, Germany adopts exchange
• Sept. 1931 – Redemptions of the pound
sterling for gold prompt the U.K. to suspend
Great Depression
• 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.
Great Depression
• 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
Great Depression
• 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 (193536)
• Evidence shows that an early departure from
the gold standard hastened a nation’s
economic recovery.
Change in Price Level in U.S.
Consumer Price Index for All Urban Consumers: All Items
U.S. Department of Labor: Bureau of Labor Statistics
Bretton Woods Accords
• 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
Bretton Woods – U.S. Role
• 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
End of Bretton Woods Era
• 1960s – countries largely sterilized dollar
• 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
Post 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
Free capital
Fixed exchange
“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
Peter L. Bernstein
Ahmed, Liaguat (2009), Lords of Finance: The Bankers Who Broke the World (New York: Penguin Press).
Bernanke, Ben (2004), “International Monetary Reform and Capital Freedom” (Remarks at the Cato Institute 22nd
Annual Monetary Conference, Washington, D.C., October 14).
Bernanke, Ben (2004), “Money, Gold and the Great Depression” (Remarks at the H. Parker Willis Lecture in Economic
Policy, Washington and Lee University, Lexington, Va., March 2).
Bernstein, Peter (2008), A Primer of Money, Banking and Gold (Hoboken, N.J.: John Wiley & Sons).
Bordo, Michael D. (1981), “The Classical Gold Standard: Some Lessons for Today,” Federal Reserve Bank of St. Louis
Review, May.
Bordo, Michael D. (1993), “The Gold Standard, Bretton Woods and Other Monetary Regimes: A Historical Appraisal,”
Federal Reserve Bank of St. Louis Review, vol. 75, no. 2, March/April.
Brands, H.W. (2006), The Money Men: Capitalism, Democracy, and the Hundred Years’ War over the American Dollar
(New York: W.W. Norton & Co.).
Brunner, Robert F., and Sean D. Carr (2007), The Panic of 1907: Lessons Learned from the Market’s Perfect Storm
(Hoboken, N.J.: John Wiley & Sons).
Butterman, W.C., and Earle B. Armey III (2005), “U.S. Geological Survey Mineral Commodity Profiles—Gold,” Open File
Report 02-303 (Reston, Va., U.S. Department of the Interior and U.S. Geological Survey, June).
Kenen, Peter B. (2008), “Bretton Woods System,” The New Palgrave Dictionary of Economics Online (Palgrave
Macmillan),> doi:10.1057/9780230226203.0161.
Officer, Lawrence H. (2008), “Gold Standard,” The New Palgrave Dictionary of Economics Online (Palgrave Macmillan),> doi:10.1057/9780230226203.0653.
Thorson, Eric M. (2011), Statement of the Inspector General, Department of the Treasury, Before the House Committee
on Financial Services, Subcommittee on Domestic Monetary Policy and Technology (Washington, D.C., June 23).
Throop, Adrian W. (1976), “Bicentennial Perspective—Decline and Fall of the Gold Standard,” Federal Reserve Bank of
Dallas Business Review, January.
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