the

The Rise and Fall of the Gold Standard

why did gold fail as a currency as we

look at the history we find it

surprisingly never had much success

while gold and silver have had value

throughout history gold was often not

the dominant form of money and silver

dominated far longer

the earliest gold memories gives us

insight into why gold is so popular it

also allows us to see how history has

consistently repeated itself over time

the earliest gold memories are in

ancient Egypt the ancient Egyptians

loved gold because it reminded them of

their Sun God raw who was referred to as

the mountain of gold in ancient Egypt

gold represented the flesh of the gods

and was used for anything eternal or

indestructible but despite their love of

gold barley was used as their money the

first recorded use of gold as money it

was 2400 years later in 643 BCE or

before the Common Era in Lydia Lydia had

rich gold and silver deposits and they

were the first to discover how to

separate the two valuable minerals

Lydia is located in present-day Turkey

which is next to present-day Iran

despite its wealth the Lydians were

captured by the Persian leader Cyrus the

Great around 550 BCE Cyrus the Great may

not be too well-known to modern-day

North Americans but he is still a hero

to this day in Iran he was known to be a

brilliant military strategist who is

also merciful he freed the Jews from the

Babylonians and allowed them to return

from exile to Jerusalem in 539 BCE and

they were able to begin the

reconstruction of the Second Temple the

Persians melted down the gold and remade

new coins but the Persian gold reserves

would soon transfer to the Greeks

Alexander the Great invaded and took

over the Persian gold and melted down

the coins to display his face however

over time there was the basement which

was a problem which would soon occur in

the emerging Roman Empire it also shows

a key flaw in paying for things with

inherent value such as paying for good

with gold or silver the rule was

codified by Gresham in the 1500s he said

bad money drives out good we will

explain this in a second but first let's

explain to basement the basement can be

seen in the following exam

essentially a coin can buy a certain

number of apples say 50 but over time

the coin has less and less gold or

silver in it but it can either buy the

same amount of apples or more apples

however over time people realize there

is less gold or silver in the coin and

there is inflation which means you need

more coins to buy the same 50 apples say

you need now 10 coins instead of the

original one the Romans used mostly

silver as their currency and not gold

its citizens accepted some debasement

and the coin could buy 1.6 to 2.8 times

its metal content meaning the coin was

worth more than the silver in the coin

however as the Roman Empire weakened the

quality of the metals and debasement

grew over time the amount of gold or

silver in the coin was reduced but the

Roman government demanded tax payments

in pure gold and silver and issued coins

added to base price you might call this

unethical and corrupt and only very

early governments would steal from its

citizens like this at this time gold was

not used much as a currency but

commodity money was showing notable

flaws but how would gold work as a

currency as we move through the Middle

Ages and governments became more

organized and trustworthy we will answer

this question and this will help us

figure out why gold failed as a currency

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Thomas Gresham created the famous law in

the 1500s which says bad money drives

out good this means while coin may start

at 50 apples eventually less valuable

coins replaced the valuable ones which

is the issue with commodity money people

would do everything such as clip coins

to remove precious silver and gold

content from the coin as we move through

the Middle Ages gold continued to be

used in a similar fashion to the way the

ancient Romans Greeks Persians and

Lydians used it gold was rare and silver

continued to be the currency of choice

however we saw early precursors of paper

money in 7th century China and in the

eleven hundreds under the yang Dynasty

China used fiat money which means the

money had value because the government

said so Fiat is the type of money that

we use today however this was not very

successful and the people preferred

transacting in silver but this

introduction was written about by Marco

Polo an Italian merchants and Explorer

who traveled to China in the 1300s the

first fiat currencies entered Europe in

the 1500s in Spain but commodity money

was still dominant starting in the 1300s

gold would rise to prominence through

the floor and gold coin first made in

Florence Italy the Florin became a

benchmark for international trade

especially for large transactions gold

also played an important role in

Christopher Columbus's travels

King Ferdinand of Spain who financed

Columbus in the late 1400s said get gold

humanely if you can but at All Hazards

get gold as we moved back to England in

1640 Charles the first the King of

England Ireland and Scotland indirectly

accelerated the use of paper money and

the private banking system by seizing

everyone's gold at the time private

citizens kept their gold at the Royal

Mint Charles seized their assets to pay

off his debts though he did first ask

the citizens nicely for charity before

seizing the gold the people were not

impressed Charles the first eventually

repaid back the gold but the damage was

done

citizens now would start keeping their

gold at private Goldsmith's a goldsmith

was someone who worked with gold and

made jewelry but they started to play a

large role and they started storing

people's gold as the Goldsmith's

gathered more gold they would often lend

it out

and they are precursors for the modern

day baking system Charles the first

wooden fair so well the citizens

protested and he was eventually beheaded

in 1649 the crime was using the throne

for his own interest rather than the

good of the people

seizing citizens money put the wheels in

motion for banking as Goldsmith's

started winning paper notes the

Goldsmith's would give up paper backed

money and give a promise that they would

pay the Bank of England was not happy as

many institutions had many different

notes the monarchy sought to win back

power of the currency over the

Goldsmith's but they wouldn't just yet

the government of England would take

back control of the currency in 1708

when it restricted the Goldsmith issue

of notes as we move through the 1700s

gold was becoming more prominent many

historians attribute Sir Isaac Newton as

having a fundamental role to play in the

rise of the gold standard Newton wrote

his theory on gravity in the 1680s and

because he was a prominent figure many

historians want to say that not only did

an apple fall on his head but a gold bar

did also so how was he involved in

currency Newton had a midlife crisis at

51 or in 1693 and he took a ceremonial

but high-paying position as warden of

the Roman which was responsible for

making new coins soon he became the

master of the men which paid about 1.2

million equivalent in today's US dollars

versus only about 60,000 of an academic

in his new role Newton would lower the

value of silver relative to gold and the

historians say this moved England on to

the gold standard let's see what Newton

did in an example previously it would

cost 20 coins to buy one gold coin

but Newton lowered it to make it 21

which means it would take more silver

coins or would be more expensive to buy

gold with silver than it was before

this change came into effect in 1717

despite this change the historians are

not correct before Newton made this

change silver was already exiting

Britain rapidly as people continued to

buy gold in fact before Newton made this

change the government asked him why

silver was exiting so quickly

Newton responded that he believed people

love silver for fashion but either way

this change of 5% from 21 to 20 was not

going to do much when we examined that

is

I can see at the time between silver

prices in England and Asia in England it

took fifteen pounds of silver to buy one

pound of gold but in China it took only

10 meaning silver was 50% more valuable

in China and Newton's five percent

change was not the key difference that

historians claim as we moved through the

1700s silver continued to be melted and

shipped abroad and silver was depleted

eventually there was such a small amount

of silver that the gold standard had

arrived in everything but while in 1774

wiko contract said that citizens could

not use silver if the transaction was

larger than 25 pounds wars with France

started in 1793 the French sought to

gain territories one General at the time

Napoleon was very successful and began

winning large amounts of territory as

war took its toll England lost gold

England suspended convertibility of the

people's bank notes into gold a cartoon

from the time shows Prime Minister

William Pitt trying to seduce an older

lady for her gold that is how badly gold

had been reduced for the government as

war with France continued paper money

flourished but surprisingly so did the

economy 1792 to 1815 saw a period of

continuous economic growth in 1804

Napoleon would crowned himself Emperor

of France and the Wars continued until

1815 the decline of silver continued in

1816 Britain reduced the silver in a

silver coin by six percent but the coin

would still be worth the same amount

however citizens could convert this

silver coin into gold for the correct

value the point of this was to keep

silver coins in circulation by reducing

silver in the coin but having it still

buy the same amount of gold coins it

would ensure people didn't melt down

these coins as they were less valuable

and therefore had more value than silver

value England was able to rebuild his

gold reserves and by 1821 citizens could

freely convert their notes into gold but

the long time period of holding

banknotes made the people fairly happy

to keep them and they didn't exchange

these notes so rapidly for gold during

this time people gained confidence for

paper money the gold standard was

formalized for the first time in history

in 1821 the money in the economy of

Great Britain would revolve around gold

meaning prices would rise if more gold

was found but as we moved through the

1800s there would be a new powerhouse

the United States and soon

actions would determine Gold's fate

while Europe was moving towards gold the

pre-us and the 1700s was actually using

tobacco for its currency but this

quickly changed the u.s. introduced

paper notes around its origins in 1776

but like many early paper money

countries it had runaway inflation

therefore in the 1780s a constitutional

convention for states to pay their debt

only in silver and gold the US was

quickly on a bi-metal standard soon the

US would move towards more of a gold

standard in 1834 then US President

Andrew Jackson made the coinage Act

which undervalued silver and more silver

was then shipped abroad because of the

mispricing even though the US was

technically on a bi-metal standard there

were signs of difficulty during the

Civil War from 1861 to 65 the US began

issuing notes with no convertibility

showing a in the commodity based

standard that in times of duress having

a money supply that could grow was

needed the u.s. act in 1873 refused to

turn silver into legal tender so people

who owned large amounts of silver could

no longer turn it into money in the u.s.

essentially now the US was on the gold

standard in all but official name the

International gold standard was peaking

at this time in 1871 many countries

began tying their money supplied to gold

as Britain did in 1821 first Germany and

Switzerland Belgium Italy France then

the Nordic countries then the

Netherlands then Spain Austria Russia

Japan India finally the US formal as the

gold standard when it officially tied

the US money supply to gold through the

gold standard Act in 1900 the money

supply was based on gold meaning a

citizen could convert a $1 banknote for

the equivalent value of gold the gold

standard was peaking at the start of the

20th century but right at its peak it's

the client would soon begin C by

committing to an international standard

it reduced the us's ability to print

currency putting constant inflationary

and deflationary pressure on the economy

in many countries on the standard after

1871 had to shortly abandon it and then

reinstate it when citizens wanted to

convert a lot of money

there was tremendous inflation in the

early 1900's as more gold was found in

Alaska but then there would be periods

of rapid deflation as the economy grew

quicker than gold the Federal Reserve

was created in 1913

and gold and it would come at odds this

was because the feds goal was to create

a stable currency this was essentially

impossible to do when money was tied to

gold the gold Senate had already failed

in many wars such as in the French war

in the late 1700s when Britain suspended

convertibility but politicians needed a

modern day war and World War one shook

everyone's confidence in the standard

forever

many countries had to abandon the

standard in World War one as they were

not able to pay gold to citizens and

they needed to keep their gold to pay

for war supplies a huge issue with the

standard is if people wanted their gold

in order to dissuade them a country

would have to raise its interest rates

because then that person would get more

interest on their money but higher

interest rates would then slow down the

economy this would always be an issue

with the gold standard instead of

choosing economic paralysis countries in

World War one abandoned the standard in

the 1920s the u.s. tried to restore the

gold standard but it led to a huge

contraction in their economy and around

the world but by the mid 1920s under us

threat France and Britain actually

rejoined the standard but as we moved

into the Great Depression more issues

with gold were appearing a quick issue

is seen that all the countries when

they're on the gold standard relied on

each other following the rules Milton

Friedman the famous economist of the

20th century proved that the u.s.

started and perpetuated the Great

Depression gold actually flowed into the

u.s. during the Depression it was

explained as follows if the US was

hardest hit then as people were poor and

they would buy less goods from Britain

as people did worse prices would drop in

the u.s. this would make us Goods more

attractive to British people British

people would then pay for those goods in

money which was backed by gold meaning

gold would enter the US however the

Federal Reserve was supposed to play by

the rules and expand the money supply

but it did not involve the gold and this

currency never entered the US market so

during the Depression US prices dropped

by over 30% if prices drop it

incentivizes one to hold currency as why

buy something today if it's cheaper

tomorrow the economy greatly contracted

seeing all the issues President Franklin

Delano Roosevelt abandoned the gold

standard with his 1934 gold Hawk this

would reduce gold to a short footnote in

history the u.s. essentially seized

everyone's gold this is what the Romans

did in the early 80s previously people

were promised they could convert their

bills into gold but now they couldn't

the

new world governments were perhaps more

formalised bigger and stronger but the

US government and the world just did the

same thing that the Romans did they

promised their citizens convertibility

into gold or silver the citizens stored

gold with the government and trusted

them and then the government seized all

the gold and said we will not pay you

back in gold this isn't an argument

against the current Fiat standard but it

is an issue of how to best run a gold

standard can government's ever be

trusted with your gold the last remnants

of the dying gold standard can be seen

in the Bretton Woods Agreement which was

created in 1944 and went into effect in

1946 once again we can see that

governments could not be trusted with

gold the US had a lot of power after

World War Two as a control more than

two-thirds of the world's gold the

standard said the US would redeem

international US dollars held by foreign

countries into gold if needed for a time

the system worked but as the economies

of Europe and Japan improved the u.s.

invested more US dollars abroad most

people would assume the standard failed

because the US had a negative trade

balance but during this time the current

account or the trade account was

actually mostly a trade surplus it was

actually through the capital account

where money exited the US and when in to

foreigners hands for example an American

buying a $100 Canadian bond would be a

negative $100 capital balance this

Canadian could then redeem $100 for an

American gold at home from Franklin

Roosevelt US citizens could not redeem

their dollars into gold but

international citizens could and they

can now demand payment as we move

through the 1950s this deficit averaged

3.1 billion dollars a year as

international u.s. dollars grew relative

to its gold balance the US had little

choice but to end convertibility once

again gold was promised $4 but it was

not redeemed in 1971 President Nixon

closed the gold window and in 1973 at

the current system that we have today a

free floating currencies was established

the gold standard was dead guys if you

enjoyed this video please hit the like

button and subscribe so let's quickly go

over a summary of why gold failed gold

is not a safe haven despite

people think there's basically no place

to put your gold if you store your gold

with the government the government has

shown throughout history that it will

steal your gold if you store your gold

with private citizens well that's also

pretty risky and runs essentially a

libertarian government so there's no way

to safely store your gold this is what

guys like Peter Schiff don't get would

he argue a purely libertarian standard

where only private citizens keep gold

and what would happen in times of duress

what governments then do what they

always do is take the gold

this would need to be established in a

future gold standard the third reason is

gold is unstable as can be seen in this

chart there's constant inflation and

deflation air pressures when using the

gold standard this is because if the

economy grows quicker than gold then

there would be deflation and if gold is

found such as in Alaska and 1909 there's

rapid inflation more will be discussed

about fixed currency issues in a future

video but essentially fixed

money supply currencies or currency

based on some sort of commodity usually

has negative effects for an economy the

worst part of gold is it's terrible in a

recessionary environment where countries

are bounded to some fixed money supply

so when there is a recession people want

to redeem their gold but this is the

worst time for the government as they

need their gold to pay for things in

order to keep the gold the government

starts raising interest rates which

slows down the economy further

essentially gold is one of the worst

currencies use when a recession occurs

as we said we'll discuss the issues of a

fixed money supply currencies in a

future video but it can be seen in

reason number three that a fixed money

supply can produce rapid inflation and

inflation the last reason is the gold

standard is unfair if there is deflation

it incentivizes miners to find new gold

and when miners find new gold they

essentially share in all that wealth

essentially wealth it is printed by

people who mined the gold which isn't a

very fair system of wealth allocation I

hope this helps summarize where the gold

standard failed and why the currency

should never be used in the future