Should the U.S. Use the Gold Standard?

Should the U.S. Use the Gold Standard?

More and more people are becoming interested in the United States economy as it fluctuates and reacts to changes in the market. Many may wonder how the dollar is valued, what determines the status of the economy, and how standards affect overall economical health. Though the U.S. shifted away from the gold standard after World War I and in the early 1970s, there are many economists who think returning to the gold standard could be a positive change. Here’s everything you need to know about what the gold standard is and if the U.S. should use it.

What Is the Gold Standard?

Gold Bars Stacked

The gold standard is an economic system in which paper money’s value is directly linked to gold. People started using gold as early as 550 B.C. for trading, and the system rapidly evolved to include paper notes you could exchange for gold. This meant that if you had gold, you could store it in a bank and then use the paper note showing you had the gold to make purchases. The system of using paper notes showing your gold started the use of paper currency and created the gold standard.

Over time, economies and currencies changes, and so did the gold standard. Many countries used a bimetallic standard that incorporated both silver and gold, since there was more silver available than its counterpart. Great Britain was the first country to implement an official gold standard in the early 1800s, which affected global trade and caused governments to stockpile gold.

Why Did We Stop Using the Gold Standard?

World War I was the first event to challenge the gold standard. During this conflict, alliances and global relationships changed, which caused the value of gold to fluctuate. This fluctuation made many people wonder if gold was a consistent variable on which dollar amounts could be determined. The lack of belief in the value of gold affected the economy and made many economists believe that something more flexible could help economies bounce back faster during global events.

Following World War I, the U.S. experienced the Great Depression and the stock market crash of 1929. Other countries had their own difficulties with currency and the economy, including Germany attempting to pay back war fees and France attempting to find balance in the franc. Great Britain suspended the gold standard in the early 1930s, and the United States increased the price of gold from around $20 to $30 per ounce in an attempt to help the economy.

World War II brought another period of even more disruption and uncertainty, and several nations got together following the conflict to implement a new economic system. In this system, rather than all currencies being valued in relation to gold, currencies were valued in relation to the U.S. dollar, which was valued to gold. This created a sort of indirect gold standard. This indirect gold standard continued until the early 1970s, when other countries pulled out of the agreement and brought an end to the gold standard.

Alternatives to the Gold Standard

Rather than value all money to gold, some countries chose to use silver as the primary value-holding asset. Others chose to create a mix of silver and gold that could hold value for paper money.

The fiat system is what the United States currently uses, and it’s a flexible system in which the dollar changes in accordance with the market. Rather than receiving its value from something physical like gold or silver, paper money in the fiat system receives its value from the government. Unlike the gold standard, you can’t take a piece of paper money in the fiat system and redeem it for gold.

Some economists believe fiat money is better than the gold standard because it’s more cost-effective to create than gold. A government may have to mine and acquire gold, where it only has to print paper money, which is much cheaper. Fiat money may also be more reliable because its supply is controlled by the government rather than by how much of the substance is naturally available, like silver or gold.

Benefits of the Gold Standard

There are many economists who believe the United States should return to using the gold standard. These are some of the benefits of the gold standard:

  • Gold has a self-regulated amount. There’s a long history of people across the globe recognizing the value of gold, and gold also self-regulates because there is a limited amount of it available.
  • The gold standard may reduce inflation. Using the gold standard would limit the U.S. government’s ability to simply print more money, which may help the nation avoid inflation due to overprinting.
  • Using gold may restrict debt. Debt for the United States started to increase when the gold standard was abandoned. This leads many to believe that returning to the gold standard may help restrict the government’s ability to take on more debt.

Disadvantages of the Gold Standard

Other economists and citizens don’t think returning to the gold standard is an answer for the United States’ economical troubles. These are some of the disadvantages a country may experience when using the gold standard:

  • The amount of gold can fluctuate. Because the government can’t just choose to print more gold, that means the amount of gold is limited to the naturally occurring amounts. For example, if a large deposit of gold was discovered, it could result in inflation.
  • Using gold may limit the government. The U.S. government can use the current fiat system to raise interest rates, which can help the economy out of depression or assist those who are unemployed.
  • Gold’s value may not be consistent. As we saw during the world wars, global conflict can affect how people see gold and how reliable it is as a standard. Fluctuations in the value of gold can destabilize paper money and cause economic disruptions.

We hope this guide has helped you learn more about the gold standard and decide for yourself if the United States should use it. We’re pleased to serve Las Vegas and the surrounding area by being your premier jewelry and gold exchange location. Have a watch, a coin, a piece of jewelry, or gold or silver you want appraised? Contact us today for a fast and accurate assessment.

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