GOLD STANDARD ACT

In 1900, following more than a century of wild fluctuations in the valuation of U.S. currency, Congress adopted gold as the nation's monetary standard. In passing the Gold Standard Act, lawmakers rejected the bimetallic standard originally adopted in 1792: silver was no longer legal tender and paper currency (greenbacks) was now backed up by gold alone. The move to gold was inspired by the tumultuous monetary system of the late-1800s, when Free Silver advocates urged the government to issue an unlimited supply of silver coins to produce a mild (and, they believed, beneficial) inflationary effect.

Gold standard advocates believed the nation's money supply would never be stabilized under the bimetallic standard. They contended that because the open market value of each metal (gold and silver) was constantly fluctuating, the under valuation or over valuation of either metal by the mint would impact the supply of coins in circulation. For example, when the U.S. mint undervalued silver coins, savvy people opted to sell their silver coins on the open market for more than their face value. When silver was over produced and the government issued too many silver coins (as was the case after the Sherman Silver Purchase Act of 1890), the price of silver dropped and people eagerly traded in their silver coins for gold coins and thereby exhausted federal reserves.

In the election of 1896, the Free Silver forces supported Democratic candidate William Jennings Bryan (1860–1925); Republican candidate William McKinley (1897–1901) ran on a platform that included backing paper money with gold. McKinley was supported by businessmen who believed the adoption of the gold standard would stave off inflation and help the country achieve economic prosperity—McKinley won the election. In 1900 he made good on his campaign promise, signing the Gold Standard Act into law. Gold remained the standard of the U.S. monetary system until April 1933, when, in the midst of the Great Depression (a worldwide economic downturn) Congress abandoned the gold standard because the U.S. could no longer guarantee the value of the dollar in gold. The legislation enabled the Federal Reserve to expand the nation's money supply without regard to gold reserves.