Read an Academic Passage

The Gold Standard and Its Decline

The gold standard was a monetary system where a country's standard unit of currency was based on a fixed quantity of gold. Under this system, which was dominant from the 1870s until World War I, governments guaranteed a fixed exchange rate between their currency and gold. For example, a person could present paper currency to the government and receive a set amount of gold in return. This system was believed to ensure economic stability by preventing governments from printing excessive amounts of money, thereby controlling inflation.

While the gold standard provided price stability, it had serious flaws. Its primary weakness was its inflexibility. A country on the gold standard could not easily expand its money supply during an economic crisis, as the amount of money was tied to its limited gold reserves. This rigidity made it difficult for governments to use monetary policy to combat recessions and unemployment. During the Great Depression of the 1930s, this problem became especially severe. Countries that remained on the gold standard were unable to devalue their currency to make their exports cheaper and stimulate their economies.

The financial strains of fighting World War I forced many countries to suspend the gold standard, as they needed to print money to fund their war efforts. Although there were attempts to reestablish it in the 1920s, the system could not withstand the economic turmoil of the Great Depression. One by one, nations abandoned it. The era of gold-backed currency effectively ended in 1971, when the United States officially terminated the convertibility of the U.S. dollar to gold. This led to the current system of fiat money, where currency has value by government decree rather than being backed by a physical commodity.