Since its founding in 1776, the United States has had a variety of monetary systems including bimetallic systems where the dollar was backed by both gold and silver (1792-1862), a fiat monetary system (1862-1879), a full gold standard (1879-1933), and a partial gold standard (1933-1971). From 1971 to present the United States has been on a fiat monetary standard.
1792-1862: The Bimetallic Standard
In Apr. 1792, Congress passed the first Coinage Act, based on the recommendations of Treasury Secretary Alexander Hamilton, which established the U.S. Mint to provide official coin currency for the nation’s bimetallic monetary system (dollar valued in gold and silver). The act fixed the dollar as the equivalent of 24.75 grains of gold and 371.25 grains of silver.
The act specified the production of coins in the following denominations: half cent and cent in copper; half dime, dime, quarter, half dollar, and dollar in silver; and quarter eagle ($2.50), half eagle ($5), and eagle ($10) in gold. In Mar. 1793, the Mint provided 11,178 copper coins, the first circulating U.S. coins.
The first U.S. Gold Eagle coins produced by the Philadelphia Mint in 1795 had a face value of $10 and contained 247.5 grains of pure gold.
Paper money (backed by gold and silver reserves) was also printed and circulated by banks and the U.S. Treasury, though there was no legal-tender paper money prior to the American Civil War. During this time, large silver finds in Mexico and South America caused a decline in the market value of silver relative to gold, resulting in an influx of silver flowing to the U.S. mint for coinage. Gold coins began to leave circulation as their metal content became worth more than their face value.
To bring gold coins back into U.S. circulation, on June 28, 1834, Congress passed the Coinage Act of 1834 to reduce the gold value of one dollar to 23.2 grains of gold. Gold discoveries in Russia, Australia, and California in 1848 significantly increased the amount of gold on the market, and further reduced its value in comparison to silver.
In 1849, the gold influx from California prompted Congress to authorize the minting and circulation of a $1 gold liberty coin and a $20 double eagle coin. At a quarter the size of a dime, the $1 liberty coin is the smallest U.S. coin that has ever existed. The $20 double eagle is the largest.
By 1850, the silver content of coins was worth more melted down than the face value of the coin, and silver coins began to disappear from circulation. The Coinage Act of Feb. 21, 1853 was passed. The Act lowered the silver content of the coins to increase circulation of small value silver coins during a silver shortage. Some argue that this legislation pushed the United States closer to abandoning a bimetallic standard and adopting a full gold standard.
1862-1879: The Civil War Fiat Standard
Civil War spending caused a Union shortage of legal tender coins, the only American legal tender currency at the time. In Feb. 1862, less than one year after the outbreak of the Civil War, the United States passed the Legal Tender Act, authorizing the issue of the first paper fiat currency and creating a national currency for the first time. These bills, known as “greenbacks,” were not backed by gold or silver. To help finance the Civil War, the Union issued nearly $450 million of these greenbacks (and $500 billion in war bonds). The federal government had amassed a $2.76 billion national debt in 1866 (up from $65 million in 1860).
In an attempt to move to a gold standard after the Civil War, the government began reducing the amount of money in circulation by destroying the greenback bills. By this time, a national debate was boiling over whether the government had a legal right to issue fiat currency. Creditors who were angry over the war time inflation, which they believed the greenbacks had created, took the issue to court.
In 1870, Chief Justice Salmon P Chase, reversing the position he held as Treasury Secretary that greenbacks were “necessary and proper,” led the U.S. Supreme Court majority opinion that portions of the Legal Tender Acts were unconstitutional. However, in 1871, the U.S. Supreme Court overruled Hepburn v. Griswold and upheld the constitutionality of fiat currency with two decisions: Knox v. Lee and Parker v. Davis.
The 1873 Fourth Coinage Act ended the ability to exchange silver at a fixed price and discontinued government production of silver dollars. Shortly after the Act passed, the collapse of a large banking house (Jay Cooke & Co) triggered the “Panic of 1873.” During the panic, 101 banks failed as people rushed to withdraw their savings.
The Greenback Party was formed in Nov. 1874 to advocate for a fiat money standard by those who were upset over the effects of deflation caused by the Panic of 1873. They favored inflationary policies that would expand the money supply with silver currency and government-issued paper bills.
Similarly disaffected by the 1873 Coinage Act, a populist coalition of silver mine owners, farmers, and debtors formed the Free Silver Movement, which advocated for free silver under the belief that it would increase the price of crops and make debts more easily paid.
These populist movements were countered by advocates of the gold standard known as “gold bugs.” On Jan. 14, 1875, gold bugs won a victory when Congress passed the Resumption Act of 1875 (also called the Specie Payment Resumption Act), which mandated that the U.S. Treasury reduce the number of greenbacks in circulation to $300 million, replace small paper currency with silver coins, and beginning on Jan. 1, 1879, all greenbacks still in circulation would become redeemable in gold.
1879-1933: The Gold Standard
The late 19th century was marked by a series of bank failures. A small banking panic hit the United States in May 1884, when 42 banks failed, and was followed by an 18 bank failure in Nov. 1890. In 1893, a large-scale banking panic hit, triggering a deep depression and the failure of over 500 banks. The crisis began with federal gold reserves falling to approximately $100 million from $190 million in 1890, and was fueled by customers withdrawing funds from banks and defaulting on loans.
Thus, the 1896 presidential election featured debates about the gold standard. Republican William McKinley ran on a pro-gold standard platform while populist Democrat William Jennings Bryan opposed a gold standard.
Bryan, an advocate of free silver, made the issue of the gold standard central to his campaign. His speech to the Democratic national convention became known as the “Cross of Gold,” speech in which he stated: “upon which side shall the Democratic Party fight. Upon the side of the idle holders of idle capital, or upon the side of the struggling masses?… If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”
The Republican Party Platform of 1896 articulated their opposing position: “The Republican party is unreservedly for sound money. It caused the enactment of a law providing for the redemption [resumption] of specie payments in 1879. Since then every dollar has been as good as gold. We are unalterably opposed to every measure calculated to debase our currency or impair the credit of our country. We are therefore opposed to the free coinage of silver… All of our silver and paper currency must be maintained at parity with gold.”
McKinley, the pro-gold standard Republican candidate, won the 1896 election, and on Mar. 14, 1900, he signed the Gold Standard Act, officially ending the use of silver as a standard for U.S. currency and formally putting the United States on a gold standard.
On Dec. 23, 1913, President Woodrow Wilson signed the Federal Reserve Act into law. and the Federal Reserve System was created, in part, to prevent future banking panics. The Act allowed the Federal Reserve to print paper money (“Federal Reserve notes”) that could be lent to banks when the need for cash arose. At least 40% of the value of Federal Reserve notes in circulation had to be held in gold reserves.
During World War I (1914-1918), many nations were forced off gold standards, with the exception of the United States. Many later returned to gold exchange standards, in which reserves are kept in currencies other than gold that are convertible to gold, such as sterling and dollars. ]
During World War I and into the 1920s, gold flowed into the Federal Reserve from Europe as payment for U.S. imports. By Aug. 1929, the Federal Reserve banks held $3.12 billion in gold – twice the amount that was necessary to back the Federal Reserve notes in circulation.
However, 1929 marked the beginning of one of the worst American financial crises to date. On Oct. 24 of that year, Black Thursday heralded the U.S. stock market crash, which in turn triggered the Great Depression. In response, the Federal Reserve pursued a policy of deflation, allowing the money in circulation to drop in relation to its gold reserves. Between 1930 and 1932, cumulative deflation hit 30% and nearly 10,000 banks failed. By early Mar. 1933, the Federal Reserve’s gold reserves were below the legal 40% limit.
1933-1971: The International Gold Exchange Standard
In response to the deepening economic crisis, President Franklin Delano Roosevelt declared a three-day banking holiday effective from Mar. 6 to Mar. 9, which suspended the ability to redeem paper money for gold. On Mar. 9, he signed the Emergency Banking Act, giving himself emergency powers over banking transactions and gold policy. Then on Apr. 5, he issued an executive order forbidding the “hoarding” of gold (gold jewelry and coins with numismatic value were exempt). All monetary gold coins, bullion, or gold certificates over $100 were to be turned in to the government at which time people were compensated for their gold at $20.67 per ounce. The right to own gold was not restored until 1974.
On Jan. 15, 1934, Roosevelt issued a statement to Congress arguing “the practice of transferring gold from one individual to another or from the government to an individual within a nation is not only unnecessary, but is in every way undesirable,” and recommended that the U.S. government should take permanent legal “title to all supplies of American-owned monetary gold.” Two weeks later on Jan. 30, Congress passed the Gold Reserve Act, which legally nationalized all U.S. gold, meaning the federal government controlled all private stores of gold. The next day, Roosevelt devalued the dollar from $20.67 per ounce to $35 per ounce – the price it would remain at until 1971. This devaluation was undertaken to stabilize domestic prices, and within a few years the 10.27% average annual inflation of 1932 had transformed into a 2.99% average annual inflation in 1935. In 1936, construction of the U.S. Bullion Depository at Fort Knox was completed to store the government’s gold reserves and by Dec. 31, 1941 it held 649.6 million ounces of gold.
At the conclusion of World War II in July 1944, the Bretton Woods system was finalized by delegates from 44 countries at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire. Primarily designed by John Maynard Keynes, advisor to the British Treasury, and Harry Dexter White, Chief International Economist at the U.S. Treasury Department, the system was meant to establish and maintain exchange rate stability and promote economic growth. The Bretton Woods system established the International Money Fund (IMF) and the International Bank for Reconstruction and Development (now the World Bank Group). Under the international monetary system, all countries agreed to keep the value of their currency stable by not inflating or deflating their currency by more than 1%. The dollar became the mechanism by which this was made possible as countries bought and sold dollars to keep their own currencies stable. The United States pledged to back the dollar with gold and any foreign holder of dollars could exchange dollars for gold at $35 per ounce.
Foreign aid, foreign investment, and military spending created a surplus of U.S. dollars in the 1960s and the country did not have enough gold to cover the dollar at $35 an ounce of gold. President John F. Kennedy, followed by President Lyndon B. Johnson, worked to support the dollar and the Bretton Woods system. But, by the late 1960s a large fiscal deficit had developed as the United States increased its printing of dollars to fund expenditures on the Vietnam War and Johnson’s “Great Society” social programs.
In 1965, Congress approved minting of copper and nickel clad coins to replace silver coins. On Mar. 5, 1965 and in Mar. 1968 respectively, Congress passed laws to “eliminate gold reserves against Federal Reserves deposits” and to “eliminate the gold reserve against Federal Reserve notes.”
1971-present: The Fiat Standard
On Aug. 7, 1971, the Joint Economic Subcommittee on International Exchange and Payments reported that the U.S. dollar was “overvalued” and urged that the dollar be devalued. As a result, President Richard Nixon announced on Aug. 15, 1971 that dollars held by foreign countries would no longer be exchangeable for gold in order to “protect the dollar from the attacks of international money speculators.” Called the “Nixon Shock,” the actions led foreign countries to redeem dollars for gold immediately. French President George Pompidou sent a warship to retrieve France’s gold from the New York Federal Reserve Bank.
While the 1971 actions did not kill the Bretton Woods system immediately, the system would suffer another blow in Feb. 1973 when the dollar was further devalued and six European Community members de facto abandoned Bretton Woods.
President Gerald Ford signed legislation in 1974 allowing Americans to own gold bullion again, which repealed the Apr. 5, 1933 order against “hoarding” gold implemented by President Roosevelt. Thus, when President Ronald Reagan was elected in 1980, monetary conservatives saw an opening for policy change and began advocating for a return to the gold standard to fight inflation. Regan appointed the U.S. Gold Commission to study the issue on June 22, 1981; however, the commission “oppose[d] the issue of Treasury gold-backed notes or bonds,” and concluded that “restoring a gold standard does not appear to be a fruitful method for dealing with the continuing problem of inflation,” on Mar. 31, 1982. The commission recommended that the U.S. Treasury begin production of gold bullion coins for sale to the public. On Dec. 17, 1985, President Reagan signed the Gold Bullion Act of 1985 authorizing the production of U.S. gold coins minted by the Treasury for the first time in 50 years.
The debate would then largely fall fallow. However, during the 2012 presidential race the gold standard debate resurfaced when Republican candidate U.S. Representative Ron Paul (R-TX) made the topic a major focus of his campaign. Paul had been a member of the 1981 Gold Commission but did not agree with the conclusions of the majority. Paul and the minority of the commission concluded: “the only way price stability can be restored here (indeed, in the world) is by making the dollar (and other national currencies) convertible into gold. Linking money to gold domestically and internationally will solve the problem of inflation, high interest rates, and budget deficits.”
The 2012 Republican Platform called for a new gold commission to “investigate possible ways to set a fixed value for the dollar.” In response to the renewed debate, Federal Reserve Chairman Ben Bernanke addressed the issue of a gold standard in a 2012 lecture, arguing that a gold standard “would not be feasible for both practical reasons and policy reasons.”
According to the World Gold Council, as of the end of 2019, an estimated 197,576 tonnes of gold has been mined throughout history, with about two-thirds having been mined since 1950. Almost all of that gold still exists because the metal is virtually indestructible. If all 197,576 tonnes of gold were placed in a cube, the cube would only measure about 71.2 feet (21.7 meters) on each side. 47.0% of that gold is currently jewelry, 21.6% is in private investment, 17.2% is in official holdings, and 14.2% is in other forms.
Although there is now no official link between the dollar and gold, the U.S. Treasury reported holding 261.5 million fine troy ounces (about $11.0 billion) in gold between the Federal Reserve and the Mint on July 31, 2020. The U.S. Mint holds about 2.8 million ounces of its gold as “working stock” to be used in the production of official U.S. gold coins for sale to the public as numismatic collectibles and for investment purposes.
The gold standard debate enjoyed a brief resurgence in 2020 during the confirmation hearings of Judy Shelton for the Federal Reserve Board. Shelton favors a gold standard, adding credence to rumors that officials in President Donald Trump’s administration were promoting a return to a gold standard. However, the debate was overshadowed by the continuing COVID-19 (coronavirus) pandemic, during which, on Aug. 5, 2020, gold prices rose to $2,000 per ounce for the first time ever due to a pandemic-weakened dollar. The debate over whether to return to a gold standard has largely been quiet since.
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