The Demise of the Gold Standard

This is the fiftieth anniversary of the demise of the gold standard and the beginning of the current fiat paper standard. Many will say “good riddance” to gold and “thank goodness” for the “good ole greenback”! Reflection, however, produces an alternative conclusion.

To be sure, the opinion of current experts places great weight on paper money. Economists, bankers, and central bank bureaucrats are so universally in support of paper and in opposition to gold that a person would be hard pressed to think otherwise. However, Larry White has shown that monetary and macroeconomists are biased by the professional incentives they face.

In contrast, history has much to say in support of commodity monies, such as gold. Paper monies have lost value over time, with price inflation, as more and more paper money has been created. Paper money economies have also experienced instability in the form of business cycles and economic inequality, including the Great Depression and the post-1971 experience. In the limit, economies have resulted in hyperinflation or have facilitated war, most especially World War I and subsequent wars.

To resurrect the potential of gold, one only needs to reflect on the current use of the term “gold standard.” While we can no longer rely on gold for money, companies often attach the “gold standard” label to their products and services to advertise the quality, consistency, and reliability of their business. It could be protein shakes, delivery companies, or security systems; everyone knows what the term means even though they have no personal experience with gold itself.

President Richard Nixon ordered the “gold window” closed, preventing other nations’ central banks from exchanging their US dollars for our government’s gold hoard at $35 per ounce, as agreed under the post–World War II international agreement known as the Bretton Woods system. Why did he do so? Why in 1971, and why has this temporary dictate lasted fifty years?

Money came into existence thousands of years ago when people started trading, for example, grain for silver and then trading silver for a tool, rather than trading grain for a tool. Gold and other metals have served as money, or the medium of exchange, for thousands of years. Humans have risen from an animalistic hunter-gatherer society to their modern existence through trade, specialization, and entrepreneurship that was spawned by a good form of money.

Governments have intervened in this process, created monopolies, and inflated the money supply by various means, with often disastrous results. However, little more than a century ago, money was still a commodity that was traded internationally and was beyond the strict control of governments.

That changed with the advent of central banks around the world before World War I. The Bretton Woods system was meant to mimic a gold standard for international trade, but it was doomed to a miserable failure, because in it the US, and only the US, could, in effect, print gold to pay its bills.

What is the real gold standard and what is it not?

The gold standard is the phrase for the international system of money that developed over thousands of years. It replaced self-sufficiency, economic primitivism, barter, and early commodity monies, such as grain, salt, and shells. The quality of money improved hand in hand with economic development and improved living conditions.

Eventually, people adopted monetary metals, such as silver, copper, and gold for exchanging goods and services. The gold standard is simply the near-universal use of these metals in trade, but history shows that early adopters were the economic success stars of their times. The value of the monetary unit was simply a measure of weight and purity, and its purchasing power and international flows were governed by markets, not governments. The key distinguishing feature of the system was that the metals were private property and not a mere symbol or representation of ownership.

Rulers were not blind to this goose that laid golden eggs. Government monopolies, the replacement of state images for minter’s marks, and eventually paper replacements debased the system. Government central banks were established in the major economies by 1920. This in turn fed the devastation of the world wars. Nixon’s closing the gold window should be seen as the end of the last remnant of the gold standard, not some kind of internal breakdown. Governments controlled most of the gold and set its price.

The gold standard does not mean that governments decide what is money, how it shall be produced, and what is its market value. In the absence of centuries of government intervention, money could have morphed into an even more sophisticated system. The emergence of bitcoin and cryptocurrency is a reminder of this potential and the turmoil of problems that government can cause.

Returning to the gold standard will be difficult, not because of its profound benefits and miniscule cost, but because of the political roadblock governments will place in its way as well as the revelation of the harms that have been imposed in its absence. Here are some of the benefits of a renewed gold standard.

The most obvious benefit would be a rollback of price inflation around the globe and relative price stability. Although there are no guarantees, stable money will encourage saving and economic growth. Stable purchasing power of money will allow entrepreneurs and consumers to better calculate and plan for the future. Market- instead of Fed-determined interest rates might very well be more volatile in the short run, but that would also make the timing of investments more efficient and less prone to error. With constant high price inflation, paper assets depreciate and often lose their function while physical assets appreciate. Monetary stability would remove that divide and restore the viability of long-term assets like corporate bonds and life insurance.

The destruction of wealth that occurs with central bank paper money is bad enough, but this money also skews the distribution of income in favor of high incomes (wealth and capital) and reduces the relative incomes of lower incomes (labor and pensions). Historians have long noted that these effects occur during inflationary periods. Austrian economists have more recently tried to demonstrate this paper disturbance in more modern times. Even Thomas Piketty has unknowingly showed that the increase in inequality in the US occurred after Nixon’s dirty deed in 1971.

Austrians have also led the charge against the Fed’s monetary policy as the generator of the business cycle and the social dislocations that result. This is a two-step process. First the Fed sets its target, i.e., price control on interest rates, and then it manipulates the money supply to maintain the target by manipulating the banking system.

Interest rates set below market-determined rates cause booms in long-term investment projects and an expansion in the economy. As the boom accelerates, some wages and prices increase, along with land and real estate values. The Fed then raises its target to dampen those increases and the economy falls into a contraction, with its inevitable unemployment and bankruptcies. After the contraction is recognized by the Fed, they start a new round of lower rates and expansion: the business cycle. Some people are enriched, many are harmed, and the economy is destabilized.

The current scheme has also resulted in much more government spending and deficits, which were partially controlled even under Bretton Woods. Since its demise, the national debt has exploded ever higher, accompanied by persistent and increasing trade deficits.

The gold standard as money was a tremendous bargain for humanity and an effective check on government, and its end should be sorely lamented.


  • Mark Thornton is the Peterson-Luddy Chair in Austrian Economics and a Senior Fellow at the Mises Institute. He serves as the Book Review Editor of the Quarterly Journal of Austrian Economics. His publications include The Economics of Prohibition (1991), Tariffs, Blockades, and Inflation: The Economics of the Civil War (2004), The Quotable Mises (2005), The Bastiat Collection (2007), An Essay on Economic Theory (2010), The Bastiat Reader (2014), and The Skyscraper Curse and How Austrian Economists Predicted Every Major Crisis of the Last Century (2018).

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