When Did US Currency Stop Being Backed by Gold and What Happened Next?

The US currency used to be backed by gold, but that changed in 1971. This marked a significant shift in the way the US economy functioned.

Prior to 1971, the US dollar was pegged to the value of gold, with each dollar equivalent to a certain amount of gold. The US government held a large reserve of gold to back up the currency.

The decision to stop backing the dollar with gold was made by President Nixon in 1971. This move was in response to a decline in the value of the dollar and a shortage of gold reserves.

The US government's gold reserve had been dwindling since the 1960s, making it difficult to maintain the gold standard. The decision to abandon the gold standard was a complex one, but it ultimately allowed the US to print more money and stimulate the economy.

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The history of US currency is a fascinating story that spans centuries. The first coins used in the United States were minted in 1792, with the Coinage Act establishing the US Mint.

The first paper currency issued by the US government was in 1862, during the Civil War, to finance the war effort. The Federal Reserve System was created in 1913 to regulate the nation's monetary policy.

The US currency was originally backed by gold, with the Coinage Act of 1873 establishing the gold standard. This meant that the value of the dollar was pegged to the value of gold. The gold standard remained in place until 1933, when President Franklin D. Roosevelt suspended it.

In 1934, the US government devalued the dollar in relation to gold, reducing its value from $20.67 to $35 per ounce. This move was intended to stimulate economic recovery during the Great Depression.

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The gold standard is a monetary system that directly links a currency's value to that of gold. This means that a country on the gold standard cannot increase the amount of money in circulation without also increasing its gold reserves.

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For half a century, starting in 1879, the US was on the gold standard, allowing Americans to trade in $20.67 for an ounce of gold. The country effectively abandoned the gold standard in 1933.

The gold standard was designed to prevent government overspending and inflation, as the global gold supply grows only slowly. This would theoretically hold government overspending and inflation in check.

The US abandoned the gold standard in 1933 to help combat the Great Depression. Faced with mounting unemployment and spiraling deflation, the government found it could do little to stimulate the economy.

The US government had to keep interest rates high to deter people from cashing in deposits and depleting the gold supply. This made it too expensive for people and businesses to borrow.

President Franklin D. Roosevelt cut the dollar's ties with gold, allowing the government to pump money into the economy and lower interest rates. Most economists now agree that this break with gold was the main reason the US got out of the Great Depression.

The U.S. abandonment of the gold standard was a deliberate move to combat the Great Depression. Faced with mounting unemployment and spiraling deflation, the U.S. government found it could do little to stimulate the economy.

To deter people from cashing in deposits and depleting the gold supply, interest rates had to be kept high, making it too expensive for people and businesses to borrow. In 1933, President Franklin D. Roosevelt cut the dollar's ties with gold, allowing the government to pump money into the economy and lower interest rates.

This break with gold was a crucial move, and most economists now agree that it was the primary reason the U.S. got out of the Great Depression. The U.S. continued to allow foreign governments to exchange dollars for gold until 1971, when President Richard Nixon abruptly ended the practice to stop dollar-flush foreigners from sapping U.S. gold reserves.

The U.S. effectively abandoned the gold standard in 1933, and completely severed the link between the dollar and gold in 1971. The country now has a fiat money system, where the dollar's value is not linked to any specific asset.

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A fixed link between the dollar and gold would severely limit the Fed's ability to fight recessions or control an overheating economy. Economist Barry Eichengreen likened a gold standard to the euro zone, where countries like Greece can't print more money or lower interest rates because they're stuck with a fixed currency.

The euro zone's predicament is a stark warning of what could happen if the US returns to a gold standard. Greece, for instance, can't print more money to stimulate its economy.

Gold supplies are unpredictable and unreliable. If miners went on strike or new gold discoveries suddenly stalled, economic growth could grind to a halt.

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The gold standard has been a topic of debate again, particularly among libertarian and conservative groups.

Libertarian Rep. Ron Paul made a return to "honest money" a key plank of his presidential run, and the idea took hold among Tea Party conservatives.

They argue that the U.S. debt now exceeds $16 trillion because the government has become too cavalier about borrowing and printing money.

The gold standard "forces the U.S. to live within its means", said investment strategist Mark Luschini.

Think of it as a person with a debit card rather than a credit card, the debit card holder can only spend what he or she has in the bank.

The idea of a commission to investigate setting a fixed value for the dollar was even included in the Republican Party's 2012 platform.

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