The Gold Standard

1. What is the gold standard?

The gold standard is a defunct (non-existent) monetary system whereby countries link their
currencies (e.g. the U.S. dollar) to the value of gold. In this way, gold could be freely exchanged
into dollars, and dollars into gold.

Note: In the U.S. the monetary system includes the U.S. Mint, which prints and coins money; the
Federal Reserve, our central banking system; and commercial banks (e.g. Bank of America).

2. What does the gold standard have to do with money?

For thousands of years, gold has been a treasured asset (something which stores and retains
value) that could be used as a medium of exchange (money) to buy goods and services, pay
debts, etc. Because barter (e.g. the exchange of pigs for corn) became more difficult as
transactions and economies became more complex, money in all its forms (e.g. beads, shells,
precious metals, currencies, and credit cards) made more sense.

Often entire economies were built around the acquisition of gold. Beginning in Europe during the
Age of Exploration, nation-states like Spain and Britain competed for supremacy and pursued
an economic policy known as bullionism (or mercantilism) in which wealth depended on trade
surpluses (exporting more than is imported) and the accumulation of gold and silver bullion
(think nuggets and bars). Such economic policy led, in part, to colonialism in the Americas,
Africa, and Asia and to the tragic exploitation of people and environments.

In the more recent past, countries linked their currencies to the value of gold for greater
monetary stability. But this was wishful thinking, as even the value of gold can fluctuate
dramatically. Supply (quantity available) and demand (quantity desired) affects the value of gold
as it does all things. In 1324 when Mansa Musa--King of Mali and Lord of the [gold]
Mines--visited Mecca (Islams holiest city), he gave away so much gold (some 16,000 pounds)
as a display of wealth that the economies of Egypt and Arabia nearly collapsed.

3. Do we still use the gold standard?

No. Following WWII, when the U.S. emerged as the worlds economic superpower, many
countries linked their currencies to the U.S. dollar; in turn, the U.S. linked its dollar to the value
of gold at a fixed rate. But individuals were no longer able to exchange money for gold, only
central banks could. Some countries, notably France, did not trust the U.S. dollar and began
exchanging its dollars for gold. As a consequence, U.S. gold reserves decreased rapidly. In
response, President Nixon formally ended the practice of exchanging dollars for gold in 1971;
for all practical purposes though, the U.S. itself abandoned the gold standard in 1933.
Today currencies are valued against one another based on the market forces of supply and
demand. Because the U.S. is the biggest economy in the world and its dollar is among the most
stable currencies, the U.S. dollar remains the gold standard, figuratively speaking. The U.S.
dollar, like gold in the past, can be spent or exchanged anywhere for any currency.

4. How long has our society relied on gold standard?

This is a tricky question. Britain was the first to introduce the gold standard in 1821. In the U.S.
a gold standard existed between 1879 and 1933; other countries relied on the gold standard, to
varying degrees, until 1971. (It may be worth noting that a silver standard existed in a number of
countries even earlier still but fell out of favor just as quickly.)

5. Can you tell me everything you know about the gold standard?

I have more or less done so, except to note that talk of a return to the gold standard, while not
widespread, is ongoing. Gold bugs, or those that favor a return to the gold standard, believe it
would stabilize the value of currencies and limit inflation, or the increase in the price of goods
and services over time, an inevitable consequence of currency-based economies. I am not an
economist, but, in my opinion, the idea is ridiculous. Ill leave it to Ben Bernanke, former
Chairman of the Federal Reserve:

The gold standard would not be feasible for both practical reasons and policy reasons. On the
practical side theres just not enough gold to meet the needs of a worldwide gold standard. But
more fundamentally than that, the world has changedIn a modern world, the commitment to
the gold standard would mean that we are swearing that under no circumstances, no matter
how bad unemployment gets, are we going to do anything about it using monetary policy.

Note: Monetary policy is the action that a central bank, like our Federal Reserve, can take to
affect the money supply (the amount of money in circulation) and, theoretically and practically,
both rates of inflation and unemployment.

6. What are the benefits of using paper money today?

Again, paper money is much more convenient than barter. And it functions much like gold once
did. It is a store of value (it retains value over time); it is a unit of account (or a standard
measure of value); and it is a medium of exchange (an acceptable method of payment).
Because the U.S. dollar is backed by the full faith and credit of the U.S. government, it is, so to
speak, worth its weight in gold. This therefore depends on your faith in the government (or the
people, depending on your perspective). But if the U.S. economy and government were to fail,
youd have more to worry about than the convenience and value of money. You might have to
prepare for the zombie apocalypse :)

7. What are the problems of using paper money today?

Well, as you know it can be lost, stolen, counterfeited, etc. I think its safe to say that paper
money will gradually be phased out as forms of electronic payment (e.g. credit cards, online
transfers, bitcoins, etc.) become still more popular and convenient. Who knows? One day you
may scan your retinas like a barcode to make a payment of one kind or another.

I hope this helps, Jaelin. Your topic is a complicated one since it depends on an understanding
of many other economic concepts. Let me know if I can help clarify further.

Mr. C