Throughout history, the U.S. and other countries adopted variations of silver and gold standards, which use the metals, either directly or indirectly, as money. According to the Federation of American Scientists in its “Brief History of the Gold Standard in the United States,” the Gold Standard Act of 1900 made the gold standard official for the United States by declaring that all forms of currency issued in the country must be backed by gold. The act identified gold as the standard unit of account and set the worth of various forms of legal tender as represented in gold.
Silver to Gold
Although the U.S. first used a bimetallic standard of gold and silver to back currency, the silver standard was the norm for the country’s first 40 years. The U.S. Treasury passed an early coinage act that prescribed the amount of silver, alloy and gold in minted coins. As silver continued to lose value, it was relegated to domestic use, while gold was favored for international commerce. The 1834 change in the silver-to-gold ratio in minted coins from 15-to-1 to 16-to-1 increased concern that claims would be paid with less valuable silver. By 1850, silver coins had practically disappeared and gold was the country’s primary domestic coin.
The Gold Standard Act
The Gold Standard Act of 1900 officially established a gold reserve to back government-issued paper notes. The uncertain use of the gold standard created risk and instability in financial markets, especially for international investors. The act removed the risk that the U.S. might redeem notes with less valuable silver. The Federal Reserve, the country’s first central bank, was created in 1913 and charged with managing the gold standard to prevent economic instability. Although the Gold Standard Act ended the issuance of Treasury notes, the use of other types of legal tender continued. Silver certificates, greenbacks and silver dollars were redeemable for gold.
The Gold Standard Act set the dollar’s gold value at 25 8/10 grains of gold and identified this as the standard unit of value. The act requires the U.S. Treasury to redeem certain notes in gold coin and establish divisions of issuance and redemption. The act also authorized the U.S. Treasury to receive gold coin deposits, issue gold certificates and hold the gold for redemption use only. Provisions in the act allow the Treasury to cease redemptions when reserves fall below a certain amount. Section 14 states the Gold Standard Act does not forbid the use of international bimetallism when appropriate, according to the Iowa State University.
End of the Gold Standard
Economists and historians debate the reasons for the unraveling of the gold standard, but the U.S. Federal Reserve notes that the 1930s Depression is largely credited with ending the system in the United States and internationally. Hoping to alleviate the impact of instability in the international gold standard and the effects of the Depression, President Roosevelt ended the country’s use of the gold standard in 1933. The Gold Reserve Act of 1934 allowed the president to nationalize and devalue gold to protect the country’s currency system.