Gold is up˳ The dollar is down˳ People are worried about the value of paper money˳ There was a time, of course, when paper money was backed by gold — the era of the gold standard˳ The story of why that era came to an end includes a nervous breakdown, a global panic, and a presidential adviser who was an expert on cows and chickens˳
The gold standard was a promise˳ If you had a dollar, you could take it to the government any time you want, and trade it in for a fixed amount of gold˳ In the U˳S˳ year after year, $20˳67 got you an ounce of gold˳ In the early part of the 20th century, all the world’s key economies were on the gold standard˳ But in 1931, the system began to unravel in the most powerful country in the world: England˳ When the Great Depression hit, the people in England panicked, and started trading in their paper money for gold˳ It got to the point where the Bank of England was in danger of running out of gold˳ This was a terrifying thought — particularly for Montagu Norman, the head of the Bank of England˳ Norman faced an impossible dilemma: It was becoming increasingly difficult for England to remain on the gold standard˳ But abandoning it was unthinkable for Norman and his contemporaries, who came of age at a time when the gold standard was the unquestioned anchor of the global monetary system˳ Norman’s response to this dilemma: a nervous breakdown˳ “The pressures of the job got to him, and he collapsed one day,” says Liaquat Ahamed, author of the book Lords of Finance˳ “He thought that the future of Western Civilization was in his hands, and he basically couldn’t function˳” Norman’s doctor told him to leave the country and get some rest˳
While he was gone, his colleagues at the Bank of England realized they had no choice˳ They were about to run out of gold˳ So they abandoned the gold standard˳
It was like a bomb went off˳ People all over the world thought, if England can do it, anyone can˳ And all around the world, as countries’ economies got worse, people started turning in their paper money for gold˳
When President Franklin Delano Roosevelt gave first fireside chat on March 12, 1933, the U˳S˳ had just had the mother of all bank runs˳ “Because of undermined confidence on the part of the public there was a general rush by a large portion of our population to turn bank deposits into currency or gold,” Roosevelt said˳
When he gave this speech, Roosevelt knew the gold standard was a problem˳ But he wasn’t sure what to do about it˳ In fact, his top economic advisers were telling him to stay on the gold standard˳ They felt the same way as Montagu Norman: Gold was what held everything together˳ But there was one guy advising FDR to leave the gold standard – an economist who Ahamed describes as a “crank˳”
“George Warren had helped him deal with some of his trees on his estate,” he says˳ “He was an agricultural economist˳” Warren had written a book on dairy farming, and devised a system for getting chickens to lay more eggs˳ He had also done a lot of work studying the way the gold standard affected commodity prices and the economy˳
He told FDR that the country had to leave the gold standard – and Roosevelt took his advice˳
When FDR told his advisers about the decision, “they all exploded,” Ahamed said˳ Dean Acheson, assistant secretary of the Treasury, resigned˳ Another adviser said it would be the end of Western Civilization˳
But it wasn’t˳ The experts of the day were wrong about the gold standard˳ “Most economists now agree 90% of the reason why the U˳S˳ got out of the Great Depression was the break with gold,” Ahamed says˳ Going off the gold standard gave the government new tools to steer the economy˳ If you’re not tied to gold, you can adjust the amount of money in the economy if you need to˳ You can adjust interest rates˳ Almost all economists agree, the system we have today is better than the gold standard˳ Not perfect, but much better˳
For more:
Listen to our podcast, “Gold Standard, R˳I˳P˳,” and read our entire series on gold and the meaning of money˳
