The End of the Gold Standard

Last Updated on December 10, 2024

The end of the gold standard was not a single event. It happened in stages.

The beginning of the end was in 1914, with the outbreak of World War One.

The European powers ended convertibility of paper money into gold in order to finance the war through the printing press.

This concluded the international monetary system known as the classical gold standard and left the United States standing alone as the sole power still on gold.

The United States went off a pure gold standard under President Franklin Roosevelt during the Great Depression in 1933.

FDR required US citizens to hand in their gold and prohibited them from converting their paper money into gold.

The US Dollar was still defined as a weight in gold. An ounce of gold was equivalent to USD$35 or rather one US Dollar was worth 1/35 ounce of gold.

However, under FDR’s changes to the monetary system, citizens could not convert their paper into gold and therefore this arrangement could not be considered a true gold standard.

Rather gold became a reserve asset backing the US Dollar.

Free convertibility is required for a true gold standard.

The final step in the end of the gold standard came under President Nixon in 1971 when he famously “closed the gold window.”

While US citizens were not able to convert their paper money into gold after FDR, foreign governments were still able to do so until 1971.

After the Second World War, the United States had assumed the role of sole economic superpower and foreign currencies were tied to the US Dollar at fixed rates, which was in turn tied to gold.

This gave the United States a privileged position, which they abused by printing more paper money than they could redeem in gold. This inflationary policy angered the Europeans, particularly the French, who then began to redeem their US Dollars for gold at $35/oz as was their right.

Nixon’s actions in “closing the gold window” in practice meant that the US government was suspending the right of anybody to convert their United States paper money into gold.

With that action, the gold standard came to a complete end.

Saifedean Ammous summarises this succinctly in The Fiat Standard:

“It took two world wars, dozens of monetary conferences, multiple financial crises, and three generations of governments, bankers, and economists struggling to ultimately bring about a fully operable implementation of the fiat standard in 1971.”

A Brief History of the Gold Standard

In order to fully understand the end of the gold standard, you need to understand how it began, how it worked and the limitations it placed on governments.

Gold has been used as money for thousands of years going back to ancient times.

However, for most of gold’s history as money, it has circulated alongside other monetary media, most notably silver.

In modern history, a gold and silver standard was relatively common among powerful nations and both Britain and the United States used a bimetallic standard.

The problem with a bimetallic standard is that governments set a ratio between gold and silver and this government ratio invariably gets out of step with the true market ratio.

When this happens, one of the metals becomes overvalued and the other becomes undervalued. In a phenomenon known as Gresham’s law, the overvalued metal gets spent and the undervalued money disappears from circulation.

Britain accidentally put herself on a de facto gold standard in 1717 when it overvalued gold and drove all the silver out of circulation. The United States did exactly the same thing in 1834.

Both nations recognised the reality of the situation and chose to abandon bimetallism and adopt a mono-metallic gold standard instead. In Britain this was done in 1816 and in the United States it happened in 1873.

While the failure of bimetallism was unintentional, it was a happy accident for both nations, as gold is a superior monetary standard than silver.

Saifedean Ammous explains:

“By the nineteenth century, however, with the development of modern banking and the improvement in methods of communication, indiuviduals could transact with paper money and checks backed by gold in the treasuries of their banks and central banks. This made gold-backed transactions possible at any scale, thus obviating the need for silver’s monetary role, and gathering all essential monetary salability properties in the gold standard. The gold standard allowed for unprecedented global capital accumulation and trade by uniting the majority of the planet’s economy on one sound market-based choice of money.”

The move of Britain and the United States onto the gold standard inspired many other large powers to do the same. The period between the 1870s and 1914 became known as the classical gold standard. By 1912, 49 countries were on the gold standard and those that weren’t held as reserves the currencies of those that were.

The defining feature of a gold standard is that a national paper currency is defined as a fixed weight in gold and those holding paper currencies are free to redeem or convert their notes into gold.

Under this system, gold is the real money and the paper notes are used for convenience.

The benefit of the gold standard is that the currency supply is remarkably stable. Governments are restrained in their ability to produce more paper money because they are obligated to be able to convert it into gold. The ability of the public to demand redemption produces an extraordinary disciplining effect.

Gold has a very high stock to flow ratio and therefore a very low rate of new gold supply is brought onto the market relative to the existing stock.

Stability in the currency supply produces economic benefits.

Michael Bordo describes the era of the classical gold standard as:

“A remarkable period in world economic history. It was characterized by rapid economic growth, the free flow of labor and capital across political borders, virtually free trade and, in general, world peace.”

For governments, however, the restraint gold places on the currency supply is a hindrance.

Governments only have three methods of raising revenue:

• taxation
• borrowing
• monetary inflation aka the printing press

If they don’t have the easy option of monetary inflation they have to rely more heavily on the first two options. But taxation and borrowing have significant constraints.

So when war broke out in 1914, governments took the easy option for finance. They ended the gold standard, which enabled them to increase the supply of money and fund the war through the printing press.

The End of the Classical Gold Standard

In 1914, Britain was the world’s financial superpower and London was the world’s financial capital.

In the same way as the world currently looks to the United States and to the Federal Reserve as the world’s centre of monetary policy, so too did the world then look to the Bank of England.

A banking panic began in England on 24 July 1914 when it became known that Austria had made an ultimatum to Serbia in retaliation for the assassination of Archduke Franz Ferdinand.

Contagion spread across Europe. Interest rates rose from 3% to 10%.

Commercial banks were under pressure. The Bank of England was under pressure.

Gold reserves had fallen to £14m. Bailout loans that the Bank of England had issued in the crisis were £32m.

There were rumours of a run on the banks. If it had happened, the pound would have collapsed.

A bank holiday was already scheduled for Monday 3rd August. The government extended this bank holiday until Thursday 6th August.

That gave the government time to prepare the Currency and Banknotes Act 1914, which was passed on August 6th.

While this did not suspend redemption of paper notes in gold, it did give authority for the Bank of England to issue paper money as legal tender.

Given the paper money inflation that occurred as a result, and according to Gresham’s law, gold coins disappeared from circulation. This saved the British financial system but effectively ended the gold standard.

Legally, one could still convert paper money into gold, but as Leland Crabbe explains:

“Frustrating procedural obstacles at the Bank and appeals to patriotism… effectively prevented conversion of Bank of England notes into gold.”

The other belligerent powers abandoned the gold standard entirely by suspending convertibility of paper money into gold.

Crabbe explains:

“In the early days of the war, Austria-Hungary, France, Germany, and Russia all went off the gold standard as they suspended specie payments and instituted legal or de facto embargoes on the export of gold by private citizens. Like the British Treasury, the governments of these warring countries exported gold and borrowed heavily to finance the war, but these tactics raised only a fraction of the large sums of money that the war required. Because new taxes did not and could not make up the difference, the continental belligerents financed a large share of the war by printing money.”

The United States remained on the gold standard but the international system known as the classical gold standard was ended.

FDR: The Beginning Of The End Of The Gold Standard In The United States

When the European powers went off the gold standard in 1914 it was not intended to be permanent.

Nobody knew then the scale of what was to come over the next few years. A temporary suspension to convertibility was what was envisaged with normal business resuming at the conclusion of the hostilities.

Crabbe explains:

“When the war began, belligerent governments instituted several legal and practical changes in the gold standard, which they viewed as a temporary suspension of the rules rather than as a permanent abandonment of the international monetary system. Previous wars had often forced suspension; peace had always brought restoration.”

So in 1925 Britain led the way in a return to the gold standard.

The problem was they did so at the wrong price. For primarily nostalgic reasons they fixed the pound to gold at the pre-war price, with no consideration of the monetary inflation that had occurred.

This meant that the pound was overvalued.

In addition, the 1925 gold standard was not a true gold standard at all. Convertibility was only available for 400oz or more and only to non-British residents.

The effect of this should have been that gold would flow out of Britain and into the United States.

Britain leaned on the United States to pursue an inflationary monetary policy to prevent this from happening. Uncle Sam obliged as much as possible within the constraints of their own gold standard.

The result was asset price inflation which eventually resulted in the 1929 stock market crash and subsequent depression.

The Great Depression is often blamed on the gold standard but it is more accurate to blame it on the British fixing their currency to gold at the wrong price.

Jim Rickards explains it in The New Case For Gold:

“Gold did not cause the Great Depression; a politically calculated gold price, and incompetent discretionary monetary policy, did. For a functional gold standard, gold cannot be undervalued (the United Kingdom in 1925, and the world today). When gold is undervalued, central bank money is overvalued, and the result is deflation. A gold standard can work fine, so long as governments set gold’s price on an analytic rather than political basis…The Great Depression was then prolonged by experimental policy interventions [that gave rise to] “regime uncertainty,” which meant that large corporations and wealthy individuals refused to commit capital because they were uncertain about regulatory, tax, and labor policy costs. Capital went to the sidelines and growth languished.”

President Roosevelt came to power in March 1933 in the midst of the Great Depression determined to make major reforms. This included ending the gold standard in the United States.

One of his first acts was to declare a four-day bank holiday. This enabled Congress to pass the Emergency Banking Act which provided the authority for the confiscation of gold.

The Act reads:

“To protect the currency system of the United States, the Secretary of the Treasury, in his discretion, may require any or all individuals, partnerships, associations and corporations to pay and deliver to the Treasurer of the United States any or all gold coin, gold bullion, and gold certificates owned by such individuals, partnerships, associations and corporations.”

Then on 5 April 1933, FDR issued the famous Executive Order 6102 which prohibited the private ownership of gold and required gold to be handed in to the Federal Reserve in exchange for Federal Reserve Notes.

A Presidential proclamation later followed announcing the end of the gold standard. This was then followed up with legislation in June 1933 which prohibited creditors from receiving payment in gold.

In 1934 the Roosevelt Administration passed the Gold Reserve Act. This gave the President the ability to devalue the dollar in terms of gold, which he did the following day.

Under the 1900 Gold Standard Act one ounce of gold was worth $20.67. As a result of Roosevelt’s actions it became $35 per ounce.

This is often described as raising the price of gold. But it is more accurate to say that the value of the dollar declined, since it now took more dollars to buy the same amount of gold.

These actions collectively ended the gold standard in the United States.

The dollar was still defined as a weight in gold, so there was a partial gold standard to a certain degree.

However, a true gold standard requires free convertibility from paper to gold.

Under FDR’s legislation this was not available for United States citizens. Only dollars held by foreign governments could be converted into gold.

Gold played the role of a reserve asset for the monetary system but it is fair to say that the gold standard, in its pure sense, ended at that point.

Nixon: The Final End To The Gold Standard In The United States

If FDR ended the gold standard, Nixon finished it off completely.

Under FDR, US citizens could not convert their paper dollars for gold but foreign governments could.

So in a partial sense the gold standard continued after 1933-34.

After the Second World War, the United States assumed the role of the world’s sole financial superpower. While the USSR was a geopolitical challenger, they had a planned economy and were utterly devastated by the war. The US stood alone.

It was decided at the Bretton Woods conference in 1944 that the United States dollar would replace the British Pound as the world’s reserve currency.

The dollar was to remain tied to gold at $35 per ounce and other currencies would be pegged to the dollar at fixed exchange rates. In effect this meant that all currencies were pegged to gold, via the US dollar as a kind of intermediary.

The ability of foreign governments to convert dollars for gold should have kept the United States disciplined. If they were to print too much money, those governments could just exchange dollars for gold.

Well, starting in 1965, that is exactly what happened. The United States was spending up large in Vietnam and on the Great Society and was pursuing an inflationary monetary policy to finance the spending.

They were abusing the position they had under the Bretton Woods agreement.

France called them out on it and started to sell dollars for gold. Gold began to flow out of the country.

In 1968 President Lyndon Johnson removed the requirement for 25% of the money supply to be held as gold reserves.

In 1971 President Nixon then temporarily suspended the ability of foreign governments to convert dollars to gold. This temporary suspension remains in place.

Nixon argued this was to protect the dollar against international speculators. In reality, it was to preserve the United States gold reserves, while enabling them to continue to print money.

The alternative would have been to contract the money supply, reduce spending and maintain convertibility.

The fact that this didn’t happen means they defaulted on their obligations under the Bretton Woods agreement.

And by ending the ability of those select few who could redeem paper for gold, Nixon put the final nail in the coffin of the gold standard.

At that point, the US dollar became a fully fiat currency.

Frequently Asked Questions

1. When Did The Gold Standard End?

The end of the gold standard was a process rather than a single event. It started in 1933 when FDR prohibited US citizens from converting paper money into gold. The final was in 1971 when Nixon ended the ability of foreign governments to exchange their US dollars for gold.

2. Did Nixon or FDR End the Gold Standard?

It depends on how you look at it. Most people say Nixon ended the gold standard. This is true, but what he really did was put the final nail in the coffin of a process that had started decades earlier. Nevertheless, while FDR’s actions meant the US monetary system ceased to function as a true gold standard, it still functioned as a quasi-gold standard. Nixon’s actions meant nobody on earth could exchange US Dollars for gold at a guaranteed government price. Therefore, at that moment the US Dollar became untethered from gold and became a fully fledged fiat currency.

3. Why Was The Gold Standard Abandoned?

Nixon took the dollar off gold because foreign countries had the temerity to redeem their US Dollars for gold. As the US inflated the currency supply foreign governments did not want to hold devaluing dollars. It made sense to them to take those devalued dollars and take advantage of the fixed gold price of $35 an ounce. Nixon blamed currency speculators but in reality this was an entirely logical thing for foreign governments to do. The gold standard was abandoned because the US did not want to part with their gold.

Conclusion

The end of the gold standard as an international standard came in 1914.

Most World War One belligerents suspended convertibility of their paper money into gold.

Britain technically retained convertibility but printed vast sums of legal tender paper money forcing gold out of circulation.

The United States retained the gold standard during and after World War One.

However, during the Great Depression, the United States, under President Roosevelt ended the gold standard.

The dollar remained a defined weight in gold after FDR’s monetary reforms, but since citizens were prohibited from exchanging their paper money for gold, it cannot be called a true gold standard after that point.

In 1971 President Nixon brought a final end to the gold standard in the United States by ending the ability of foreign governments to convert their US dollars into gold, making the US dollar a fiat currency.

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Sources

Ammous, Saifedean. 2021. The Fiat Standard. Saif House.

Bordo, Michael D. 1981. “The Classical Gold Standard: Some Lessons for Today.” Review 63.

Crabbe, Leland. 1989. “The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal.” Federal Reserve Bulletin, June: 423–40.

Rickards, James. 2019. The New Case for Gold. London: Penguin Business.

Image Credits

Gold Reserve Act 1934 is in the public domain

Solidus is licensed under CC-BY-SA 4.0

1877 Half Union is in the public domain

Star of England Troopship is in the public domain

Executive Order 6102 is in the public domain