The gold standard is a system in which currency in a given country is tied to a specific amount of gold.
What this means is that the government would agree to sell an amount of gold for a specific price and people could trade in their currency for a respective amount of gold.
For example, let’s assume the government has agreed to sell gold at $100 an ounce. You have fifty dollars. While the government was on the gold standard, you could say that your fifty dollars was worth half an ounce of gold. If you had $100 and wanted to convert that into an ounce of gold, you could do that as well.
The Beginnings of the Gold Standard
The gold standard has existed for a long time, but after the fall of the Byzantine Empire, most countries were on the silver standard. The Spanish, for example, used the silver standard to back their dollar—also known as the pieces of eight—on which the United State dollar is based and which was essentially the first world currency.
Throughout the nineteenth century, however, countries began to abandon the silver standard for the gold standard. The United Kingdom became the first world power to switch to the gold standard, which they did in 1821. They were followed by Canada, the US, and Germany during the remainder of the nineteenth century.
Although the gold standard enabled people to convert their currency for gold, governments could also suspend this ability. This would often happen during times of war, when the government would need large amounts of gold with which to purchase good and supplies. During the Civil War, the United States suspending citizens’ ability to convert their currency into gold, but reinstated it after the war ended.
The End of the Gold Standard
A panic in the early 1930s led to many people and foreign governments to convert their American currency into gold. Because the United States was still on the gold standard, this forced the Federal Reserve to likewise reduce the amount of currency in circulation. This in turn led to the United States government, led by President Franklin Roosevelt, removing the US Dollar from the gold standard. With the decision by the United States in 1971 to no longer allowing the direct convertibility of US Dollars into gold, the United States was officially off the gold standard.