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By 1914, the currencies of most developed countries represented given amounts of gold – while gold remained a commodity traded on the world market. Gold, in other words, was commodity money. Commodity money had a long history in the form of cigarettes, barley, silver, salt and sea shells. Developed nations had made trade among them easier by having agreed to use a standard value for their money, and that standard was the commodity gold. Some people liked the gold standard because it gave them confidence that their money was worth what what their government claimed it to be.
In the U.S. in 1896, the Democratic Party wanted to make it easier for farmers and other debtors to pay off their debts. They believed that basing the U.S. dollar on both silver and gold would accomplish this by increasing the money supply. Thus the Democratic Party's candidate for President, William Jennings Bryan's speech that included, "You shall not crucify mankind upon a cross of gold."
In 1900 in the U.S., President William McKinley, a Republican, signed into law the Gold Standard Act. This established gold as the only standard for redeeming paper money. Silver was a commodity to be used for other things.
Then came World War I. Before the U.S. joined that war, Europe's belligerents printed a lot of money to pay for their war effort. Britain was among them. It was old stuff. Not enough was being collected in taxes to pay for their war efforts. The British government had suspended convertibility of their currency during the Napoleonic wars, and the US government had done so during the US Civil War, with convertibility resumed after the war.
During the war, the printing of paper money was inflating currencies, and gold was passing to the United States as the belligerents paid for goods that they needed.
After the war, those nations that had gone into deep debt found returning to the gold standard an unattractive option. Leaving their currency off the gold standard and inflated helped them reduce their debt. Germany, having lost much of its gold, was forced to issue more and more paper money, leading to hyperinflation.
In 1925, Britain, in conjunction with Australia and South Africa, returned to the gold standard. The British were proud of their currency, the pound, and pegged it to gold at a prewar level: around $4.87 per ounce – a move by conservatives, including Winston Churchill, to whom pride was important. The circulation of gold in the form of coins was not allowed.
France returned to the gold standard in 1928. The French Franc was pegged to the dollar at 20 percent of its prewar value. With their currency undervalued, the French picked up a lot of foreign trade and prospered. The British had overvalued their currency and were losing trade. And they were losing more gold.
In 1931, at the outset of the Great Depression, Britain left the gold standard because it was losing much of its gold. Australia and New Zealand had also given up on the gold standard, and Canada followed suit. That year, Japan and the Scandinavian countries also left the gold standard.
Franklin Roosevelt became president of the United States in 1933. Roosevelt closed banks for a few days in order to stop "heavy and unwarranted withdrawals of gold and currency" and to stop "increasingly extensive speculative activity." A month later in a national emergency move he made it illegal for U.S. citizens to own gold. And two weeks later, on April 19, the United States officially abandoned the gold standard except for a few gold coins. The move allowed the government more flexibility in adjusting its money supply.
An international agreement for a measurement of value regarding currencies was established in 1944, near the close of World War II, at Bretton Woods outside Washington DC. The agreement fixed exchange rates relative to the U.S. dollar, and the U.S. dollar was convertible into gold at $35 an ounce.
This lasted until 1971. The U.S. had been spending more money than it had on its war in Vietnam, and the U.S. war running a balance of payments deficit and a trade deficit. The administration of President Nixon solved its problem, as other nations had during World War I, by inflating the dollar. President Nixon announced that the U.S. would no longer convert dollars to gold at a fixed value. It was called the "Nixon shock." The U.S. did not have enough gold to back the dollar. The value of the dollar would now be governed by the money supply and what it would buy.
Into the 21st century the dollar remained as the reserve currency for much of the world. In other words, the dollar was being held by many governments and institutions as part of their foreign exchange reserves – which was dependent on confidence in the dollar's value. The dollar was filling the role that had once been filled by gold.
Some people in the United States continued to believe in commodity money – not commodities such as salt or corn. A precious metal continued to be more convenient, and tradition inspired gold as the commodity of choice.
And rather than gold representing an absolute value, speculators were driving the price of gold higher on the commodities market by buying gold in anticipation of selling it later at a higher price – subject, of course, to falls in price with the bursting of anticipation bubbles.
A few people continued to view gold as having an absolute value. That it did not was one of the basic points that Adam Smith made back in the 18th century.
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