Originally posted by: RichardE
What was the importance of the Gold Standard in American history during the period of 1910 to late to late 1940's? I'm reading a book that seemse to center around it, and am embarassed to say I don't know the importance/history of it during this time frame.
I would address this issue as the unimportance of the gold standard which did not contribute towards this nation's financial stablity, but only served to weaken this nation. In order to explain that, I am going to state some historical facts which occured before the time period that you have posted.
It is essential to recognize that United States was never truly on a gold standard. Constitutionally, United States has always been on a silver standard because our currency which is the dollar is defined in terms of silver, not in gold.
The banking establishment which had vested interest in gaing control over United States' monetary system faciliated the establishing of gold standard and demonetizing of silver. In 1873, Congress passed the Coinage Act which basically demonetized silver and made gold coins the only acceptable form of coin money.
The purpose of the Act was to make money scarce in United States and in result gave banks the control over the nation's money supply. Prior to this act, silver coins were minted by the mint free of charge. Any one could bring silver to the United States and have it struck into silver coins by the mint. Additionally, silver was discovered in United States in plentiful amount which made it quite difficult for it to be manipulated by the banks. Gold has always been historically scarce and was easy to be monoplized by the bankers.
As a result of this gold standard which led to scarcity of money in the economy, the post civil war depression ensued which lasted until 1878 when Congress passed the Sherman Law which permitted minting of silver coins once again.
The issue of free silver versus the gold standard gain momentum even after the years of post-civil war depression. Interestingly enough, one of the most important issue of 1896 presidential election was free silver or the re-instituting of the gold standard. Supporters of William Jennings Bryan knew what was at stake if the gold standard remains. He addressed this issue by saying, " We will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold." The defeat of William Jennings Bryan paved way for the continuity of the gold standard which lasted until 1934.
Having said that, I would answer your question about the period of 1910 to 1940 regarding the importance of gold standard as " a monetary base that offered no tangible advantage to the economy." The most important argument against the gold standard especially during the era as you mentioned is the Great Depression. The United States was on a "gold standard" on the onset of the depression and continued to be until 1934 when the gold standard was abolished by FDR under the Gold Reserve Act. The failure of gold standard to provide any economic stablity to the growing economy of the United States is the proof that it offers no monetary advantages.
The gold standard is not a cure for US monetary system as it was touted by the bankers who wanted to setup the standard so that they can control this nation's money supply. The argument that gold backing ties the money to a standard so that all the money issued is based on some physical entity in possesion rather than government's printing press is flawed. The fact is that even while the United States was on a gold standard, the printing press operated by the banks in conjuction with the government did not cease to exist. The banks gained the right to issue money in this country as as result of National Banking Act which deprived the government of its powers as the only entity allowed to issue and circulate money.
Additionally, the argument which had been used in that era that gold standard keeps inflation in check is quite misleading. It is misleading because of the economists lack of understanding of inflation. Inflation is our monetary system is defined as debt- induced monetary devaluation, or a chronic shortage of money accompanied with increase in debt. Our money system is debt based not commodity based. To link our monetary system to any commodity, will not solve the problem. Additionally, the practice of fractional reserve banking as practiced by the banks renders any commodity backing of the money useless when banks are given free reign to lend more money than they acutally have deposits upon.
Economists and the historians have stated over and over the merits of having a gold standard and use this argument for the so called prosperity of the roaring twenties. The fact is that roaring twenties was a product of massive increase of credit and loosening up of the money supply by the Federal Reserve. It is important to note that during the same era as you have inquired about the Federal Reserve had cornered most of the gold and gold certificates, a fact which was revealed by Congressman Louis T. Mcfadden in later years.
In the years after 1934, FDR ordered all gold to be taken away from public possession and made it illegal to own gold for Americans. It is interesting to note that during those years a substantial portion of public's wealth existed in form of gold coins or gold bullion. The government through its gold buying program infact confiscated public wealth and ammased it in its depositories. Although, the EO ordered issued called for annual audits of these depositories especially the Fort Knox depository, not a single audit has been conducted since 1953. In the later years it has been learnt that the all the gold that is being held by the United States Treasury does not belong to the US Govt, but to the Federal Reserve.
I would conclude by saying that so called gold standard was nothing more than a swindle, a means to confiscate public wealth either by government through outright purchasing from the public or by the banks who instituted this standard so that they could expand or contract this nation's money supply at will and ultimately use this gold standard as a means to transfer public wealth to few hands.