Why is the gold standard no longer used
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
