From the very beginning of humanity, gold was the most prominent currency for numerous countries. According to researchers, the earliest use was in Lydia in 600 B.C. They called it electrum and made coins by them.
During that time, they understood the processes required for separating gold from silver, which is when they created the first pure gold coin named Croesus. Back in the day, the value was based on the metal, which was within.
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Therefore, the country that featured most gold had the most wealth. That was the main reason why England, Portugal, and Spain sent explorers such as Columbus to reach the New World. They wanted to obtain more gold so that they can accumulate more wealth as a result.
What Is the Gold Standard?
In the middle of the 19th century, people had found gold at Sutter’s Raunch, which was the first moment when Gold Rush started. This particular idea helped the National Treasury to stockpile gold by printing the paper currency based on the amount of gold each individual had.
However, the Golden Standard Act started at the beginning of the 20th century established gold as the primary metal for paper currency with a value of $20.67 per ounce.
The idea was to standardize all transactions that were happening in the world, which lead to a gold standard in 1870. It allowed them the guarantee that the government has enough commodities for redeeming any amount of paper money.
It meant that people could not use coins or bullions to handle transactions, but only with paper money instead. That increased the need for global trade, and paper currency was a guarantee that the value is connected with the real currency stockpiled in central banks.
However, each time miners found abundant gold deposits, the currency value and gold prices dropped. That is why Congress established Federal Reserves with the idea to stabilize the costs of currency and other commodities in the USA.
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During World War I, both European countries and the U.S. suspended this particular act so that they can print as much money as they can to handle military expenses. The problem was in the idea that printing money will lead to hyperinflation.
The Great Depression
After World War I, the hyperinflation leads to the Great Depression, in which countries had to reject the standard. As soon as the largest stock market crashed in 1929, investors started to trade by using commodities and currencies.
That led to an increase in the value of gold, especially since the demand for it was significant, and everyone who had stockpiled money wanted to exchange dollars for it.
Bank started falling, and that increased the need for hoarding gold because people stopped trusting financial institutions.
The Federal Reserve increased interest rates because they wanted to make the dollar more valuable so that people could stop buying gold reserves. However, the higher interest rates only worsened the crisis because expenses of doing business became more expensive than it was.
Numerous companies had bankrupted, and unemployment reached peak levels. During 1933, President Roosevelt closed the banks for seven days to increase the number of reserves. He created an act in which no one could buy gold for dollars, and no one could export it as well.
The 1934 Act forbid everyone to own this particular commodity, and it allowed the government to pay for debts by using paper currency or dollar. They have also authorized FDR to reduce the value of gold by 40%.
He did that by increasing the value of it, which remained intact for 100 years, from $20 to $35 per ounce. That led to an increase in gold reserves and devalued dollar as well.
End of the Standard
Even though the U.S. had the most significant reserves, the raise of the economy brought more goods paid in dollars, which lead foreign governments to think that the U.S. does not have the backup for it.
At the same time, the Soviet Union started to produce oil, and they accumulated the U.S. dollar since that was the international currency for it.
When compared with foreign dollar holdings and the value in backup, the U.S. had only $14.5 billion in gold against $45 billion in dollar holdings. That inspired President Nixon to allow the Federal Reserves to stop redeeming dollars by using this particular commodity.
That was the end of the gold standard.