Gold standard

A country's monetary system is said to be on the gold standard when paper currency is backed by gold. This means the government fixes the value of its currency to a certain amount of gold.

Proponents of a gold standard argue that the primary effect of a gold standard is to limit inflation and deflation, since it prevents unlimited deficit spending by the government. Opponents disagree and argue that an expanding economy with a fixed supply of gold would cause deflationary pressures which would throw the economy into recession or depression. The gold standard is also strongly supported by advocates of libertarianism or minarcharism in that it creates a currency mechanism which is not based on government and therefore can limit some of the mechanisms a government might use to influence the national economy.

The United States dollar started on a bimetallic standard which was effectively a silver standard and switched to a gold standard in 1901. Starting in 1933 (?), U.S. currency was no longer directly convertible by individuals to gold and the possession of gold by individuals for investment purposes was forbidden. Transfers of gold were still used to settle liabilities between central banks.

Starting in the 1950's, the United States began running persistent trade imbalances which created liabilities in the United States to other central banks, and beginning in the early 1960's, the United States no longer had sufficient gold to cover liabilities to other nations. This became s serious problem in the early 1970's when a lack of confidence in the U.S. dollar led to mass conversions to gold. As a result, the United States went off the gold standard on August 15, 1971 when Nixon announced that the United States would no longer convert dollars to gold at a fixed value.

Nixon's move to cease allowing foreign Governments to redeem dollars for precious metal was the final act in a 150 year-long 'transfer' of the citizen's gold and silver to the Federal Government's vault. This allowed the U.S. Government to have much more freedom in determining the rate of printing and volume in circulation of it's fiat currency.