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The Gold Standard

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The Republican Party’s platform alluded to a return to the gold standard, the monetary system to which the U.S. adhered strictly until midway through the Great Depression and abandoned entirely in 1971. But what is the gold standard, anyway? Why did we leave, and what would happen if we went back on?

Leaving the gold standard

After World War II, the U.S. pegged its dollar to gold, and many other countries pegged their currencies to the U.S. dollar. The Treasury made a “promise to pay:” they would always exchange one ounce of gold for approximately $35. This system, known as Bretton Woods, prevailed through the 1960’s.

But the Vietnam War forced the U.S. to issue a considerable amount of debt, devaluing the dollar. By 1971, an ounce of gold was worth considerably more than $35. Germany, Switzerland and France exploited the U.S. promise to pay by trading in $35 USD for an ounce of gold, and selling it for more than $35 for a tidy profit.

Frustrated, Richard Nixon ended the U.S. obligation to trade an ounce of gold for a fixed amount of money in what became known as the Nixon Shock. For most of the world, the gold standard was no more. In its place came fiat currency, which allows the value of currency to float according to the principles of supply and demand.

That was then…

Why would we want to go back to the gold standard? Pegging the dollar’s value to a commodity would theoretically bring stability and prevent hyperinflation, since a government would have difficulty printing money to devalue its way out of debts. It takes the burden of monetary policy out of the hands of government (and therefore the people), and keeps them from making substantive changes, either positive or negative.

That’s the argument against the gold standard, too: if government can’t make bad decisions, it can’t make good ones, either. A body such as the Federal Reserve would not be able to lower interest rates to counteract economic malaise, as is happening now; and the dollar’s value would be at the mercy of fluctuations in the price of gold instead of in control of American policymakers.