The United States originally went on a gold standard in 1834. That is, it controlled how much money it issued based on how much gold it held. It is called having representative currency. It’s a fiscal policy that limited the U.S. Government’s spending, which is why the government is no longer on a gold standard. Going off the gold standard, or having nothing to back up the currency other than the power of the government, is called a fiat currency.
Going off the gold standard
Seven central bankers for various countries, including the United States met in secret meetings in March 1968. The result was the creation of a two-tiered pricing system of gold. The first tier was that transactions between governments represented in the meeting would continue at $35 an ounce while other transactions could find their own market price, which was expected to be between $40 and $45 an ounce.
Why the government needed to go off the standard
There are times, particularly during a war, where the government needs to spend a lot more money. A gold standard limits how much money they can spend by how much gold is in their treasury. The U.S. Government first suspended its gold standard during the Civil War in order to meet its expenses.
Other Suspensions of the Gold Standard
Many countries, including the U.S., suspended the gold standard during WWI. This led to Germany’s hyperinflation problem following the war. It kept printing money, but it had little gold to back it up so prices soared.
By the time of the Great Depression, the U.S. owned most of the world’s gold, but President Franklin Roosevelt took the country off the gold standard, which freed up to government to spend heavily on his New Deal Programs.
The Gold Standard Following WWII
After WWII, the U.S. and other countries made an agreement that essentially put them all on back on the gold standard. The countries agreed to fix their national currency exchange rates to the U.S. dollar. In return, the United States promised to fix the price of gold at $35 an ounce.
France began a long process, however, of exchanging its dollars for gold, which weakened the U.S. dollar. At the same time, the U.S. was fighting the Vietnam War and President Lyndon Johnson needed to spend huge sums of money on his Great Society programs.
This is when the central bankers met to come up with the two-tiered system.
The Gold Standard Breaks Down
Left with a ballooning budget and a country that was still partially on the gold standard, President Richard Nixon eliminated it all together for the United States in 1971.
