Gold Bullion Standard

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Under a gold bullion standard, countries hold reserves of gold in the form of bars rather than coins, removing gold from monetary circulation in the form of coinage. Instead each country establishes an official price of a fixed weight of gold in terms of its own currency. The United States was on a gold bullion standard from the 1930s until 1971, and the official United States price of gold was $35 per ounce, committing the United States Treasury to selling gold at that price.

The gold bullion standard was a means of stretching existing supplies of gold, which were not sufficient to support the international monetary system at prevailing price levels. The famous British economist David Ricardo had first suggested the idea after the Napoleonic Wars.

Under a gold bullion standard, private citizens can only hold gold for industrial purposes, such as dentistry or jewelry manufacture. Monetary gold is owned by the government and is used solely to settle international transactions. Countries without substantial gold reserves can function on a gold exchange standard, while countries with significant gold reserves remain on a gold bullion standard.

The world began to move toward a gold bullion standard after World War I, when the world’s trading partners sought to return to a version of a gold standard. With the complete breakdown of the gold exchange standard in the 1930s, the world moved toward a gold bullion standard. The gold bullion standard allowed countries to manage domestic currency supplies somewhat independently of international gold flows, giving governments more flexibility to meet the crisis of depression.

At the end of World War II the world’s trading partners established the Bretton Woods system, putting most nations on a gold bullion standard. The United States emerged from World War II owning most of the noncommunist world’s gold. Under the Bretton Woods system, the United States defined the value of the dollar in a fixed weight of gold. The United States agreed to buy and sell gold at a rate of $35 per ounce, and most other nations set the value of their own unit of money equal to a certain value in U.S. dollars.

The post–World War II gold exchange standard came to an end in 1971 when the United States stopped converting dollars into gold. By 1971 foreign central banks held more dollars than the United States could redeem in gold without substantially devaluing the dollar.