Introduction
In past decades, many countries relied on commodity money as a form of exchange. The UK and the US were among the nations that officially had their currency pegged to gold standards. In simpler terms, these countries often tended to directly link the value of their currency to that of gold. By engaging in the practice, a nation had limited ability to increase its money supply in the economy since any form of adjustment required the quantity of gold to be more in the reserves.
Generally, pegging a currency to a specific commodity reduced the government’s access to cash, thus, to some extent, lowering the overall expenditure. The US backed its dollar with gold from around 1879 to 1971, when the then-president officially removed the currency from the gold standard (Officer 333). The move raised many questions, especially among investors; however, the government did it intentionally to curb the soaring inflation rate in the country. Even though unpegging the dollar from the gold standard enabled the US to combat the effects of the Great Depression, the approach resulted in significant negative impacts.
The decision to withdraw the US dollar from being tied to the gold standard began as early as 1933 when the US government opted to go off the monetary system, whereby the value of its currency was tied to that of the dollar. During this period, the US Congress passed an agreement stopping the ever-existing right of creditors to receive payment in gold. The move was facilitated by the failure of banking institutions during the Great Depression in the 1930s (Taskinsoy). This aspect made most gold holders hoard the commodity, thus making the implemented policy unattainable.
The prevailing economic atmosphere prompted President Roosevelt to impose a temporary ban on the use of gold to influence the value of the dollar in the country. The move by the president was to restore the confidence of consumers in the economy. During the prohibition, the US president commanded the banks not to make any payments using gold or even engage in exporting them.
The US government decided to enable it to fight the economic downturn it was experiencing at the time. By having a significant amount of gold in the Federal Reserve (FR), the government’s capacity to expand the amount of money circulating within the economy improved. In order to ensure the FR had the required quantity of gold, in 1933, President Roosevelt directed that gold certificates existing in denominations above $100 and available gold coins be collected (Bruner).
In other words, the government required the public in possession of gold to turn them in to receive other forms of money different from the gold. During this period, the US government set a standard price of approximately $20.67 for every ounce (Bruner). Through this process, the US government collected a significant amount of gold from its citizens. In addition, Congress passed a law that required debtors to settle their obligations using gold. The criteria made it easier for the government to increase the gold reserve.
In order to lure more people to surrender the hoarded gold to the FR, the US government opted to increase the price per ounce. The adjustments were made from $20.67 to about $35 (Bruner). The increment influenced the majority of the public to give the commodity in exchange for another form of money. The technique allowed the government to increase the supply of money in the market. The US government chose to retain the set price of $35 per ounce until 1971.
On August 15th of the same year, the incumbent president, Richard Nixon, decided to take the dollar off the gold standard (Zoeller and Bandelj). The president made a significant announcement that the US would enhance its dollar by not pegging it to a fixed value of gold. In other words, the government changed the temporary ban made in 1933 to a permanent prohibition. On the state date, the US officially unpegged its currency from the dollar and started using fiat money as the alternative monetary system in the country.
Benefits of Removing Dollar from the Gold Standards
Increased Supply of Paper Money
Initially, the US government had difficulty in increasing the money supply in the economy because it was not easy to increase the gold supply. However, the nation chose to adopt paper money, whose supply can be readily raised in the economy, once the dollar was removed from the gold standard. Adjusting the money supply, especially through interest rates, is essential for the government to manage inflation (Bordo and Levy 72).
When there is a limited cash flow, the government can reduce borrowing rates, thus allowing the public to access capital, leading to a significant increment of money into the public. Similarly, when there is excess money in circulation, the authority can raise the interest rates, preventing the majority from obtaining funds from the financial institutions. Following the need to curb the growing inflation in the US after the Great Depression, the move to abandon pegging the dollar to gold granted the US government an opportunity to control the money supply in the economy.
Removing the dollar from the gold led to a significant supply of paper money. As the fiat monetary system took over, it became easier for most people to borrow from the banks to establish business operations in the country (Choudhary). The approach allowed most people to create many job opportunities in the country. With the increasing areas of employment, the US government, to some extent, managed to lower the soaring rate of unemployment in the economy. Therefore, the decision to completely integrate the US currency into any commodity influenced the increase in jobs in the country. Following the move, the majority of the people who lost their jobs due to the effects of the Great Depression could secure employment opportunities for their benefit.
Minimizing Gold Conversion by Other Countries
In addition, the decision to abandon the gold standard enabled the US to minimize the rate at which other countries were converting their gold into dollars. In other words, most nations tended to sell their gold to the US to obtain significant money for their investment purposes. Through the ban, the US was able to have an adequate supply of its currency in the economy. Various currencies were valued against the dollar, allowing the excessive flow of the dollar into the world economy to make the currency lose its value as compared to other money, such as the Euro. Therefore, the move facilitated the protection of dollar value in the world economy. The approach aimed to ensure the dollar value remains competitive globally.
Enhanced Stability of Banking Institutions
Furthermore, this decision allowed the banking institution to be more stable. Before removing the dollar from the gold standard, the US banks were dealing mainly with gold, especially with borrowers. Following the approach, the institutions did not have a constant capacity to provide the necessary credit facilities to investors. In other words, there was a low supply of money, making the reserves unable to support the demands of consumers in the market. However, the decision to unpeg the dollar increased the money supply, and banks could easily access large sums of money to lend to potential borrowers. The financial system was thus not impacted by limited money movement, which increased the overall stability of the sector.
How Removal of Dollar from Gold Standard Impacts Today’s Economy
Increased Demand for Assets and Rising Prices
Asset prices are constantly increasing, making it a challenge for most people to acquire them. The effect is directly influenced by the decision to unpeg the dollar from gold. In other words, the approach significantly facilitated the money supply in the US economy. Since people can access more money, they are likely to pay a large amount of money for the assets in the market (Van 127). In other words, the demand for assets in the market increased, leading to a price surge. Supposing consumers had limited capacity to obtain instant cash, the need to purchase assets such as land and houses would have reduced, making the prices remain low.
Enhanced Price Stability in the Modern Market
Similarly, there is an increase in price stability in today’s market. The US government’s approach to removing the dollar from gold gave power to the central bank to intervene in market operations. Generally, during an economic boom, the inflation rate tends to increase, which negatively affects the prices of commodities. When there are no measures to curb the changes, prices remain unstable, making the economy perform poorly. However, with powers given to the central bank, the institution has the capacity to increase the nominal interest rates. The approach enables the government to reduce borrowing, reducing the market’s money supply. In such conditions, the prices of goods and services will automatically reduce to the required level.
Growth in GDP
In addition, the country’s gross domestic product (GDP) has been increasing since the unpegging of the dollar to gold. The approach has enabled the majority of people, including investors and other business owners, to invest effectively in various sectors in the local and foreign markets. With an increase in the investment rate, the US is currently generating a large amount of national income, thus raising the GDP. The ban is making it easier for business people to access necessary financial resources from banking institutions, especially in the form of credits, to facilitate their productivity in their respective industries.
Widening Economic Inequality
Furthermore, abandoning gold standards has increased the gap between the poor and the rich in the economy today. Before the ban on pegging dollars, people had equal access to the dollar through the commodity exchange, making it easier for individuals to have cash equivalents for their commodities. However, upon removing the policy, the ability to access financial products, especially among the poor, declined significantly.
Banks require securities before issuing loans, and most low-income earners are not able to provide the necessities, thus preventing them from obtaining the products. The situation gives an added advantage to rich people who have the potential to secure the credits. Therefore, such individuals undertake a number of investment projects, hence generating more income than the less fortunate persons. The aspect facilitates the discrepancy between the two classes of people in the country.
Refutation
Even though the US intention to remove the dollar from the gold standard aimed at lowering the rising inflation in the country, the approach did not work as effectively as speculated. When the dollar was still pegged to gold, the government had limited ability to influence spending. In other words, it was not easy to increase the supply of gold in the economy, thus making it difficult to increase prices.
Money Supply
However, upon banning the monetary system, the approach facilitated the supply of money in the US market. With the increase in money in the economy, people had enough cash to spend despite the product prices. The facet suddenly increased the overall cost of commodities and services. Therefore, instead of the technique enabling the US government to tame the growing rate of inflation as it intended, it significantly continued the economic crisis.
Paper Money
Furthermore, changing the gold monetary system allowed the US government to print paper money. When a country has the capacity to produce its own money, the likelihood of printing more cash when needed is high. This aspect made the dollar lose its value in the market. Generally, when there is an increase in money supply in the economy, the respective currency loses its value against other coinage in the market. Currently, the US dollar has significantly lost its value compared to when the country pegged it on the gold standard.
Inflation and Monetary Control
Similarly, since the supply of gold is finite, the quantity held by the central bank is likely to increase at a decreasing rate as compared to the real economy. In the long run, the aspect would result in deflation. The approach would make it easier for the country to counter the influence of inflation while maintaining the value of its currency in the international market. Based on the system, the US had the potential to make proper arrangements for contracts such as labor and debt to facilitate the slow and efficient adjustment of the economy to enhance steady prices.
After the US government abandoned the gold standard, it gave authority to the central bank to effect monetary policy, including borrowing rates. Currently, consumers are experiencing soaring interest rates, which is why most potential investors forgo securing loans for investment purposes. The negative experience is that the economy has limited business opportunities that can generate proper income. In other words, the policies associated with paper money are making it difficult for investors to continue investing.
Unemployment Surge
Despite the intention to curb the issue of unemployment in the economy, the US did not manage to prevent the issue. Generally, to create job opportunities, there must be a number of companies and other businesses operating and able to employ people. Following the negative experience with the nominal interest rates, most employers found it challenging to continue investing, prompting them to quit the market or undertake retrenchment (Bernanke 966). In other words, the move to take the dollar from the standard resulted in several monetary policies that affected investors in the country.
In addition, since the government is capable of printing its own money, the productivity of the country has reduced as compared to the early years when the dollar was pegged to commodity. In other words, the value of money in the current economy does not reflect the real production in the market. Through central, when there is a need to add more money to a given project, the government issues an order, and enough capital is given. The facet is different when the dollar amount is determined by the quantity of gold.
Effectiveness of the Monetary System
Generally, having money backed with gold is essential in promoting an automatic working economy. For instance, when there is a change in the gold reserve, there will be an immediate corresponding alteration in the money supply. In other words, government interferences, including imposing interest rates, do not apply. The connection between the quantity of money in the economy and the gold present makes the monetary system balanced and effective. Based on this perspective, consumers do not have to worry about the economic uncertainty associated with the functions of money.
Currency Vulnerability
Furthermore, removing the dollar from the gold standard increases the vulnerability of the currency following the volatility of foreign exchange. Generally, when money is pegged against a commodity, they are less likely to be impacted by changes in the rates. In other words, the value of the backed currency remains stable (Evans 4). Therefore, the decision to abandon the gold made the US money face an overwhelming currency crisis, leading to reduced economic growth in the country. A fixed exchange rate gives the country an added advantage in competing in the global market (Eichengreen 16). Having a stable rate of exchange ensures there is effective development in international trade, thus generating more income for the country.
Economic Self-Interest
Having a gold standard prevents cases of personal interest in the economy. For instance, in the government, influential people such as politicians may opt to formulate and manipulate monetary policies to favor their needs. With paper money in the economy, it becomes easier for the country to face such malice acts, which can harm the general economic performance. However, when the country backs its currency to the gold standard, the officials have the potential to influence the functions of the economy, thus ensuring all the public benefit accordingly. In other words, by abandoning the gold monetary system, the US government created a loophole whereby the rich could determine the outcome of the economy.
Conclusion
The decision by the US president to remove the country’s currency from the gold standard significantly increased the country’s money supply. In addition, the approach gave the central bank the authority to implement monetary policies that can easily influence the money movement in the economy. The ability to increase interest rates allowed the US to have economic growth since most people had the ability to secure loans from financial institutions to facilitate their business projects, which in turn created job opportunities for the public.
Even though the American intention was to curb the rate of inflation in the country, abandoning the pegged money promoted an increase in prices instead of lowering them. In addition, the decision made the dollar lose its value in the international market because the US government, through its bank, could easily print the required amount without considering the corresponding productivity. Therefore, an unpegging dollar from the commodity negatively impacted the economy.
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