A Brief History of the American Gold Standard

Federal Reserve Building

The United Stated federal government backs all paper money that it issues with “full faith and credit.” But once upon a time, not too long ago, U.S. paper money was backed by actual gold.

Gold has captured the imagination of investors and everyday folk for millennia. Through the centuries it has been recognized as valuable and its owners as people of means.

Here is an overview of how the United States has used gold as part of its monetary system in the past and what role it plays today.

Gold and Silver

When the country began, currency was backed by a bimetal standard, with gold and silver working in tandem. The worth of gold was set at 15 times as valuable as silver.

But the rest of the world, in a time of surprisingly active international trade, set the value at 15.5 times – resulting in much of the gold leaving the country. In effect, silver became the standard that backed the U.S. currency for a while.

This changed in 1834 when Congress got wise and set the value at 16 times the worth of silver. In another decade or so, gold was discovered at Sutter’s Mill in California. The California Gold Rush had started, so even more gold entered the economy.

Paper Money and Gold

During the Civil War, the federal government decreed that paper currency could not be redeemed for gold or silver. It wasn’t until 1879 that the law was repealed and updated to make gold the sole backing for paper money. Silver was designated as proper for small coins and that’s all.

During this period there were many institutions issuing paper money, not all of which were legal tender. This made trade difficult and undermined confidence. To fix the confusion, the national bank system was created in 1863 to make sure the system of paper currency backed by gold worked efficiently.

Paper money was about as common for consumer and business transactions as it is today. Gold coins were just 18.7% of the total money in circulation in 1910.

The Myth of the Federal Reserve

There is a misconception about the Federal Reserve System. It didn’t come into effect until 1913, and its purpose back then was to make sure that checks were honored, just as the bank system made sure paper currency was honored.

The founding of the Fed had absolutely nothing to do with coming off the gold standard almost 20 years later.

Legal No More

In 1933, when the Great Depression was wreaking havoc on the economy, Franklin Roosevelt took the country off the gold standard. At the same time he make it a crime to hold gold for savings by nationalizing the U.S. gold stock.

The reason for the law was fear that citizens, especially at that time of drastic financial meltdown, would hoard gold, putting a run on banks. Americans had to turn in their gold coins, certificates and bullion to banks for a price of $20.67 an ounce – a number that was set by the government.

That’s the way it stayed, even after the Depression ended. During the six-year period from 1967 to 1973, the country took itself officially and fully off the gold standard. By 1976, it was once again legal for private citizens to buy gold.

Why Own Gold?

Should you own gold? What are the advantages of buying and trading gold?

To diversify: Experts agree that gold is a good way to diversify, an essential for a sensible portfolio. Market experts insist that diversification is the most predictable way to make sure you hang on to your wealth. They recommend keeping one to two percent of your portfolio in gold.

For its price: Gold is an asset that is priced below its replacement cost. That means that the cost of mining it keeps going up, right along with its cost. Pretty soon it will cost as much or more to mine as it does to buy. Thus, market watchers predict that production will fall, making your gold more valuable.

For its worth: Gold has value. When international incidents happen – whether military, political or environmental – gold prices go up. Gold is an effective hedge against inflation.

Gold also has an aura, giving a feeling of safety in difficult times. Since you have a chance to legally own gold in one form or another, it makes sense to explore the advantages for your particular portfolio.

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