Gold has long been the ultimate currency standard. Nations have gone to war over gold and have had trade wars that center around gold. Many nations back their paper money with gold reserves. Unlike paper money, gold has an intrinsic value that can be honored regardless of the source of the metal. As a result, it provides a standard for trade even when other currencies and media of exchange fail. Besides its use as a medium of exchange, gold is used by industry and in jewelry. This research examines the role of gold within the United States economy, and particularly considers the price of gold and actions taken with regard to the precious metal during the last quarter of 1994.
The United States adhered to the gold standard until 1971 (Munn, Garcia, & Woelfel 467). The gold standard merely indicates that all currency associated with a country is defined in terms of gold. While the United States was on the gold standard, its currency was freely convertible to gold at the price of $35 per ounce. In this way, currency could be converted to gold, or vice versa, at a fixed and standard rate.
From a trade point of view, the use of the gold standard helps nations control their balance of payments account. If there is a balance of payment deficit, gold leaves the country, which encourages exports and restricts imports. In time, this is supposed to reduce the flow of gold from the nation. If the nation develops a surplus of gold coming into the country, there is an inflationary effect, with the result that the gold inflow eventually drops off. These theories assume a relatively free market with few impediments to either trade or the flow of gold (Munn, Garcia, & Woelfel 466).
The use of the gold standard began to be widespread in the early part of the nineteenth century, and it began in England. In 1816, England put its currency on the gold standard, making gold the only metal acceptable for currency exchange; silver, which...