Gold Standard

                                                                     Heart of Gold

I've been to Hollywood
I've been to Redwood
I crossed the ocean
For a heart of gold
I've been in my mind
It's such a fine line
That keeps me searching
For a heart of gold
And I'm getting old

But not a CROSS of gold.

Before 1933, the United States Dollar was on the Gold Standard. William Jennings Bryan famously campaigned for the Free Coinage of Silver, arguing that there should instead be a Gold AND Silver Standard, saying that “You shall not crucify mankind upon a cross of gold.” 

Ironically silver historically was long a part of the monetary system:  

• Judas Iscariot’s 30  silver coins; 
• the British Pound Sterling was the weight of a pound of Sterling Silver at one time;  
• the US Dollar was based on a Spanish silver coin that was often divided into “Pieces of  Eight”, such that a shave and haircut was once 2 bits ( 2/8^th  of a dollar, $.25).  

It is only because Isaac Newton as the Master of the Royal Mint, knowingly or unknowingly, set the ratio of monetary silver to gold so low that effectively currency became only a gold standard.

This continued as the basis of the US Dollar until the domestic ownership of gold was prohibited in 1933, making the US Dollar no longer a commodity currency based on gold, but a fiat currency. During World War II, the United States came to have almost all of the international supply of gold. To accommodate international trade, the US entered into the Bretton Woods agreement in 1945 that effectively put international trade on a fiat basis, with the US Dollar at a fixed price of gold (instead of John Maynard Keynes’ counter proposal that the international currency should be a NEW fiat currency, the Bancor.) But the adoption of the US Dollar as the international unit of currency DID not mean that international trade was based on a commodity, but that it was fiat currency whose unit of exchange was also the domestic US Dollar.

This continued until 1971 when President Nixon pulled out of the Bretton Woods agreement and effectively returned international trade to a commodity (gold) currency. That much of international trade was still conducted in US dollars did not change this fact. The Triffin dilemma, the use of a domestic commodity for international trade, was arguably responsible for much of the moderate inflation from 1945 to 1971. However in 1971 , the US dollar whose supply was only intended to accommodate the US domestic economy, competed with US Dollars used in international trade which were NOT constrained. Inflation, heavy at first, declining but persistent, has resulted.  This continued until the adoption of the Euro which became a competitor to US dollars in international trade. While the Triffin dilemma deals with the inflation caused by the usage of a domestic currency as an international currency, Greece and Italy can speak to the reverse-Triffin impact of the usage of an international currency, i.e. the Euro, as a domestic currency.

At the heart of this matter is whether currency, domestic or international, is based on a  commodity which by definition is  a zero-sum game subject to bank runs, hoarding, currency inflation, and currency deflation, or based on a fiat, which is NOT a zero-sum game and can grow. Search for a heart of gold, but do not get crucified on a cross of gold.