Gold was the supreme measure of value and the one common currency of commerce in the world’s financial system in the early development of our nation. The Bank of England went on the gold standard in 1821, agreeing to buy or sell unlimited amounts of gold at a set rate in pounds sterling. Since the Bank of England was the dominant bank for world trade, other nations (the U.S. included) had little choice but to adopt the same standards.

A plus for a gold standard was that it made inflation impossible. A government could not add to its money supply unless it had gold to back its currency. While U.S. banks did print bank notes denominated in gold, the notes tended to carry less value the further they were removed from the issuing bank.

In the beginning, the U.S. was not a major gold-producing nation—in 1847, the U.S. produced only 43,000 ounces. That changed dramatically with the discovery of gold in California the following year. By 1853, gold production reached 3,144,000 ounces, worth almost $65 million (Limbaugh and Fuller, Calaveras Gold).

The discovery of gold in California forever changed the face of the nation. It began the tipping of the population and center of commerce from the east to the west. It made millionaires out of some and bankrupted others. It brought railroads to the west and gave rise to towns and cities, forever blending ethnicities from all backgrounds. It basically laid the foundation for today’s economy.

The sudden influx of wealth from California gold was reflected on Wall Street.
Speculation in mining shares, many of dubious value, abounded. New corporations appeared, more stocks were issued and economic optimism grew. But despite the fact that the gold standard worked to minimize inflation, it did not allow the government the option of using monetary policy to help in times of national crisis.

When the stock market crashed in 1929 and the world economies fell into a deep recession, panicking investors eventually sought to redeem their bank notes for the gold of gold standard countries. Faced with decreasing gold reserves, the Bank of England suspended all gold payments. Their stock market rallied (as did the U.S. markets) when, in 1933, the U.S. announced it was suspending the gold standard.

The end of the gold standard came to the U.S. in 1971 when President Nixon stopped all foreign redemption of Federal Reserve Notes for gold. Again, the stock market responded with enthusiasm.

Today, gold remains an inflation hedge as well as a store of wealth in times of uncertainty. However, as a long-term investment, it has produced a negative return for the past two hundred years, when adjusted for inflation (Jeremy Siegel, Stocks for the Long Run).

Gold has also provided us with the endearing description of “bulls and bears.” For entertainment, the miners in California would chain a bull by one leg in a corral with a bear. They then bet on which would survive the encounter. The optimists bet on the bull and the pessimists bet on the bear. Not much has changed in that equation in the past 150 years!