Gold standard

Money backed by metal

Under a gold standard, a currency is defined as a fixed weight of gold, and the issuer promises to exchange notes for gold at that rate. The amount of money in circulation is therefore tied to gold reserves. A government cannot simply create money to cover its spending without risking a run on its gold.

The American path

• For much of the nineteenth century the United States used both gold and silver, with interruptions in wartime. The Gold Standard Act of 1900 formally put the dollar on gold alone.
• In 1933, during the Great Depression, the government ended the public’s right to redeem dollars for gold and required most privately held gold to be turned in. The Gold Reserve Act of 1934 revalued gold from $20.67 to $35 an ounce.
• Under the Bretton Woods system agreed in 1944, other currencies were pegged to the dollar, and foreign governments could still convert dollars into gold at $35 an ounce.
• On August 15, 1971, President Nixon suspended that convertibility. Within a few years the dollar had become a fiat currency with no link to gold.

Why the link ended

By the late 1960s far more dollars were held abroad than the United States had gold to redeem them, partly because of spending on the Vietnam War and domestic programs. Foreign governments began demanding gold, reserves drained, and the fixed price became impossible to defend.

What it means for debt

A gold standard limits how easily a government can inflate away its debt, but it also limits its ability to respond to crises — one reason economists link it to the severity of the Great Depression. Under today’s fiat system the US borrows in dollars it issues itself, so the risk of running out of money is replaced by the risks of inflation and rising interest costs.

That is the comparison this site makes by pricing the national debt in gold and silver: it measures the debt against assets that no government can create at will.