From 1879, America was on a fully convertible gold standard anyone could demand that the government swap their cash for gold at a fixed rate of $20.67 per ounce, which meant that every US dollar in circulation had to be backed by gold. In turn, this meant that, despite the creation of the US Federal Reserve in 1913, the money supply was dependent on the amount of gold in America'snational gold reserves.
This prevented the Fed from printing more money in the early 1930s to counteract the effects of the Great Depression. In fact, the collapse of several banks led to a rush of investors demanding gold. That drained gold reserves, reducingthe money supply.
The depression drove several countries off the gold standard, most notably Britain in 1931. By 1932 the US was one of only six gold-standard countries. This made the dollar more expensive, hitting exports.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
In March 1933, president Franklin D Roosevelt stoppedbanks from selling gold to the public, and banned private ownership of more than five ounces of gold bullion, with the Fed buying up stocks. In June, he banned gold from being used as a method of payment in private contracts. The dollar was devalued by 40% over the next year.
Despite this, the US remained on a gold standard for nearly 40 years, with convertibility still in place for foreign banks though at a rate of $35 dollars per ounce. Indeed, the Bretton Woods agreement in 1945, which fixed most major currencies to the dollar, meant there was in effect a global gold standard from the end of World War II to August 1971, when the US left the system altogether.
-
Christmas at Chatsworth: review of The Cavendish Hotel at BaslowMoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
