Coal Mining in the United

¶ … Coal mining in the United States [...] how the gold-exchange standard system worked and why it failed. The United States (and many other countries) used the gold standard exchange system for their currency for many years. In 1933, at the height of the Great Depression that began in 1929, the U.S. abandoned the gold system for a system of flat currency. No countries in the world use the gold standard today.

The gold standard was an economic system employed by the United States and many other countries in the nineteenth and early twentieth centuries. Essentially the gold standard is a medium of exchange that uses paper currency that can be converted into pre-determined, set amounts of gold. Three authors note, "Countries on the gold standard defined a price of gold at which domestic currency was convertible. In turn these commitments set the mint par parity between a pair of currencies" (Hallwood, Macdonald, and Marsh 448). In other words, in a gold standard system, a dollar is defined as X ounces of gold (Velde). The United States actually followed a system of bimetallism from 1792 through 1873, when some coins were minted in gold, and others were minted in silver. In 1873, the country adopted a gold standard, and made it official with the Gold Standard Act in 1900 (Velde).

The gold standard has several advantages. One of the biggest advantages of the standard is its straightforwardness. People easily understand it, and the worth is fixed, making it a constantly known value. The people also understand the value of gold, and it is a tangible asset. In addition, the gold standard assures a relatively low inflation rate, because the supply of gold remains relatively stable, and the currency remains relatively stable. It also assures the country will not print too much money, because if they print too much money, people will exchange it for gold, and then the treasury will eventually run out of the commodity. It also requires a fixed set of exchange rates around the world, so it created a very stable foreign exchange market. However, that stable exchange rate is also one of the biggest drawbacks to the gold standard, because it does not allow countries to quickly respond to changing fiscal circumstances in their countries. This means that countries that use the standard are more vulnerable to extreme economic fluctuations or shocks.

The gold standard failed in the United States and around the world because it was such an inflexible system when it came to economic downturns. An economist notes, "One important reason why the gold standard was abandoned was that it seemed to require too much price reduction under already recessionary conditions" (Simmons 409-410). The country was in the midst of the Great Depression, which occurred after the stock market crash in October 1929. The gold standard was inflexible, and did not allow the country to react to the depression by lowering interest rates and stimulating the economy. The three economists continue, "It is not a coincidence that gold was suspended amidst the third banking panic as Roosevelt moved decisively to save the banks and stimulate the economy by lowering interest rates" (Hallwood, Macdonald, and Marsh 448). Another economist notes the result of the inflexibility of the system. He states, "For example, in the spring of 1995 the dollar weakened against the yen. Under a gold standard, such a decline in the dollar would not have been allowed: instead the Federal Reserve would have raised interest rates considerably in order to keep the value of the dollar fixed at its gold parity, and a recession would probably have followed" (DeLong). Another reason the system failed was because the rest of the world began to turn away from the standard as well, and it would have been very difficult to be the only country remaining on the standard without the support and exchange rates with other countries.

Most historians believe the system was "fatally flawed," and it could not be saved. Economist Beth a. Simmons notes, "Another view, championed by John Maynard Keynes in the late 1930s, is that the gold standard exchange system was fatally flawed because it allowed for an asymmetrical evasion of adjustment responsibilities between surplus and deficit countries" (Simmons 412). In other words, the finances of a deficit country were constrained because they did not have enough gold to go around, while a country with a surplus did not face those issues. In addition, usually the weight of modification falls on these weaker countries, which is another flaw in the gold standard. Because the weaker countries could not react quickly enough to economic problems, they had less capital to invest internally and abroad. Another author notes, "In principle, the free flow of capital across borders makes funds available more cheaply to poor countries and, by lifting investment, boosts GDP and raises living standards" (Author not available). Under the gold standard, capital did not flow freely across boarders of many of these weaker countries.

This flaw creates a "deflationary bias" according to another economist. DeLong writes, "Hence a deflationary bias which makes it likely that a gold standard regime will see a higher average unemployment rate than an alternative managed regime" (DeLong). This is exactly what occurred in the United States after the crash of 1929. DeLong continues, "Commitment to the gold standard prevented Federal Reserve action to expand the money supply in 1930 and 1931 -- and forced President Hoover into destructive attempts at budget-balancing in order to avoid a gold standard-generated run on the dollar" (DeLong). When Franklin D. Roosevelt took the office of President in 1933, one of the first things he did was make ownership of gold illegal for the private sector, thereby ending the gold standard. According to economists, this is consistent with more liberal political leadership. Simmons writes, "Governments whose political imperatives are more consistent with low inflation do not need externally applied constraints; tighter monetary policy is therefore more likely when the left comes to power" (Simmons 424). Roosevelt, a Democrat, shored up the economy by switching to a flat money policy, and by that time, just about every other country in the world had done the same thing. The three economists conclude, "The United States was ejected from the gold standard because its macroeconomic fundamentals got out of line with those of other members of the system" (Hallwood, Macdonald, and Marsh 448). This resulted in higher interest rates, lower production, and lower prices in the United States, which only helped worsen the effects of the Great Depression. Many historians and economists believe that holding on to the gold standard until 1933 helped lengthen the Great Depression.