During times of inflation massive government deficits, and unstable stock markets, you will often hear certain economists and politicians advocate that the U.S. should return to a gold standard to combat these economic woes. This is because gold, which is prized for its durability and usefulness, has been valuable for thousands of years while many fiat paper currencies have not.
The history of the U.S. Gold Standard, however, has never been steady, as the government has continuously shifted between different kinds of currencies since colonial days. Knowing more about the gold standard and why it remains important, however, will help you understand why buying gold has been the preferred choice for investors who want to protect their wealth.
The gold standard is a currency system represented by the metal itself (usually in coin form) or by paper notes backed with gold. The U.S. officially began with a standard based on silver and gold with a 15 to 1 ratio, but since silver was less expensive, it became the main currency for domestic purchases.
The shift from a bimetallic standard to gold did not begin until the early 1800s, when congress attempted to fix the overvaluation of silver by promoting gold as domestic currency. A massive influx from the California Gold Rush of 1849 also made domestic silver scarce, as it was worth more to export it to foreign markets facing a shortage.
The Civil War brought a great deal of economic stress, which is why the U.S. government issued its first fiat currency. These “greenbacks,” which were legal tender, abandoned the gold standard in order to fund the rising cost of war. Unfortunately, too many greenbacks were printed and the U.S. experienced high levels of inflation that compelled congress to return to gold in 1879.
A true U.S. Gold Standard, then, only existed between 1879 and1933. During this period, silver and other legal tender could all be redeemed as gold, and in 1900, the gold dollar was officially declared the standard. However, the inflexibility of this system caused numerous bank runs, which led to the creation of the Federal Reserve to prevent bank failures.
The end of the Gold Standard began during The Great Depression, when Franklin Roosevelt wanted to halt the massive outflow of gold by passing the Gold Reserve Act in 1934, which devalued the dollar and nationalized all gold. By 1976, the connection between gold and the dollar was severed entirely.
The U.S. dollar is now a fiat currency, which gives it no intrinsic value. When you hold a dollar in your hand, you are essentially buying on faith in the government’s ability to pay back its debt. The loss of this faith ultimately renders this money worthless, which is why the U.S. government has historically shifted back to a gold-based standard of some kind.
Buying gold for your investment portfolio, therefore, is one of the best ways to protect your hard-earned savings from inflationary woes, as it has always remained valuable. While a true gold standard may not be practical in today’s economy, history has shown that gold is the branch that governments and individuals cling to during economic storms.
Brandi Tolleson is a prolific freelance writer living in the greater Los Angeles area.
