The gold standard: from the classical era to the 1971 Nixon shock

The classical gold standard

Under the classical gold standard, currencies had fixed gold values, so exchange rates between them were fixed too; the dollar-pound rate was $4.867. Gold flows between countries pushed price levels back into line (Econlib: Gold Standard). Before 1933 the Fed had to convert dollars into gold at $20.67 an ounce (Federal Reserve History).

1933 and Bretton Woods

In 1933-34 Roosevelt's gold program ended domestic gold convertibility and revalued gold (Federal Reserve History). In July 1944 delegates from 44 nations met at Bretton Woods and fixed currencies to the dollar, and the dollar to gold at $35 an ounce (Federal Reserve History).

The 1971 Nixon shock

On the evening of August 15, 1971, President Nixon announced a new economic policy that suspended the dollar's convertibility into gold, ending the Bretton Woods link (Federal Reserve History). Since then, the dollar has been fiat money.

Arguments for

• Long-run price stability: because the gold stock grows slowly, the money supply and price level could not vary much over long periods (Econlib).
• Discipline: governments could not create money at will; Austrians see this as protection for savers (Econlib: Austrian School).

Arguments against

• Short-run instability: gold discoveries, such as in California and Australia around 1850, made prices unstable in the short run (Econlib).
• Depressions: Eichengreen and Sachs found that countries that left gold and devalued in the 1930s benefited (NBER w1498).
• Economists surveyed: in January 2012 no member of the IGM panel agreed that a gold standard would give better price-stability and employment outcomes for the average American; 40% disagreed and 52% strongly disagreed (Clark Center).

Bitcoin perspective

This section is perspective, not neutral analysis.

Bitcoiners often call Bitcoin "digital gold": a money whose supply can't be expanded, without gold's weak points. Gold standards ended when governments chose to suspend convertibility; Bitcoin has no issuer to suspend anything, and its 21 million cap is enforced by every node (MAX_MONEY). Critics answer that the main objection to gold, a money supply that can't respond to crises, applies to Bitcoin too. Compare the two in detail: Bitcoin vs gold.