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No longer on the Gold Standard?
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Adalwolf View Drop Down
Chieftain
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Posts: 1230 		  Quote Adalwolf Quote  Post ReplyReply Direct Link To This Post Topic: No longer on the Gold Standard?
    Posted: 24-Oct-2006 at 15:36
I know that the US, and indeed most of the world no longer operates on the gold standard. What I don't know is why the gold standard was abandoned and why it was abandoned.

Can anyone enlighten me  as to why and when the gold standard was abandoned?

Thanks for any feedback.


Edited by Adalwolf - 24-Oct-2006 at 15:37
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Timotheus View Drop Down
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Posts: 478 		  Quote Timotheus Quote  Post ReplyReply Direct Link To This Post Posted: 24-Oct-2006 at 21:41
The USA abandoned it in the Great Depression so that they could try to devalue the currency without investing in expensive gold and so try to end the depression. In actuality, it went on for another 5-6 years and we now live with a fiat currency which will collapse sooner or later. As for the rest of the world, I don't know.
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Posts: 7035 		  Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 25-Oct-2006 at 07:42
The US didn't finally abandon the gold standard until the Nixon administration in 1973, when that great realist[1] recognised that the US could no longer meet its obligations in gold. Gold immediately shot up from the price of $35 an ounce that the US had held it at since the FDR administration to several hundred dollars an ounce, peaking at $800 or so in the early 'eighties (as I remember).
 
Between the wars various countries (including the US) went on and off the standard at various times but the system was re-established by the Bretton Woods agreement of 1944, under which countries tied their currency to the dollar, which was tied to gold at $35 an ounce, so that in effect every country subscribing to the agreement was tied to gold.
 
The Bretton Woods system finally fell apart in the early 'seventies, arguably because of the inflationary pressure caused by the Arab nationalisation of their oil industries.
 
As to why it should be abandoned - there are various possible reasons. Central to them however is the desire to issue more nominal money than you have enough gold reserves to back. Why you should want to do that is another, more complicated, story but it mostly traces back to the 'money illusion' - the delusion that if you have more money you are better off, so there is continual pressure for wages, prices, dividends, welfare benefits ... to rise.
 
And you can't do that on the gold standard unless you have enough gold to back it up. And gold is in finite, limited, supply.
 
 
[1] Whatever else you think of him. He had previously devalued the dollar against gold in 1971, but it only floated from 1973 (I'm pretty sure).
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Posts: 1230 		  Quote Adalwolf Quote  Post ReplyReply Direct Link To This Post Posted: 25-Oct-2006 at 14:08
Since gold no longer backs many currencies, what does? What guarentees that $1 is actually $1?


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Posts: 279 		  Quote Eondt Quote  Post ReplyReply Direct Link To This Post Posted: 26-Oct-2006 at 02:41
Suply and demand. 
First off, USD1 will always be worth USD1 because it is the only measurement standard for goods or services in your country.  However USD1 is now worth 0.79EUR because of supply and demand between the two territories. This is influenced by trade and investment between the two territories. When international interest in you're currency is lost (lack of demand), it will devalue. If this continues to a point where you're own populace looses faith in the currency, a black market for other currencies will come into existence, trading in you're own country will start to be concluded in these foreign currencies and you're currency will lose further ground (because it became worthless in your own country). A perfect example of this is Zimbabwe where most trading now occurs in the USD or South African Rand (ZAR) and the official exchange rate stands at USD1 to ZWD259.
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gcle2003 View Drop Down
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Posts: 7035 		  Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 26-Oct-2006 at 05:29
Originally posted by Adalwolf

Since gold no longer backs many currencies, what does? What guarentees that $1 is actually $1?
 
This is the 'money illusion' I was talking about - the belief that money somehow has inherent value. It doesn't.
 
Eondt's right, but it may be worth adding that, international trading aside, even within a self-sufficient economy the value of 'money' will change sometimes quite arbitrarily. It will usually deteriorate (though not always) because of the pressure on the government to issue more of it so that the people pressing can have more.
 
That of course benefits debtors rather than creditors, but there are many more debtors than creditors around, so in a democracy anyway they tend to have their way.
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Adalwolf View Drop Down
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Posts: 1230 		  Quote Adalwolf Quote  Post ReplyReply Direct Link To This Post Posted: 26-Oct-2006 at 11:00
Economics just isn't my thing. I propose we go back to bartering. LOL
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Posts: 7035 		  Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 27-Oct-2006 at 07:31
I maybe should add that in dictatorships deliberate inflation is also pretty common, since it's a great way to diminish the influence of the rich, thereby cementing the power of the regime (and earning a considerable amount of popular support).
 
 
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