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Why Did the U.S. Abandon the Gold Standard?

Some have called for a return to the gold standard. How would it affect the economy?

What is the gold standard?

It’s a monetary system that directly links a currency’s value to that of gold. A country on the gold standard cannot increase the amount of money in circulation without also increasing its gold reserves. Because the global gold supply grows only slowly, being on the gold standard would theoretically hold government overspending and inflation in check. No country currently backs its currency with gold, but many have in the past, including the U.S.; for half a century beginning in 1879, Americans could trade in $20.67 for an ounce of gold. The country effectively abandoned the gold standard in 1933, and completely severed the link between the dollar and gold in 1971. The U.S. now has a fiat money system, meaning the dollar’s value is not linked to any specific asset.

Why did the U.S. abandon the gold standard?

To help combat the Great Depression. Faced with mounting unemployment and spiraling deflation in the early 1930s, the U.S. government found it could do little to stimulate the economy. To deter people from cashing in deposits and depleting the gold supply, the U.S. and other governments had to keep interest rates high, but that made it too expensive for people and businesses to borrow. So in 1933, President Franklin D. Roosevelt cut the dollar’s ties with gold, allowing the government to pump money into the economy and lower interest rates. “Most economists now agree 90 percent of the reason why the U.S. got out of the Great Depression was the break with gold,” said Liaquat Ahamed, author of the book Lords of Finance. The U.S. continued to allow foreign governments to exchange dollars for gold until 1971, when President Richard Nixon abruptly ended the practice to stop dollar-flush foreigners from sapping U.S. gold reserves.

Why is gold in debate again?

Libertarian Rep. Ron Paul (R-Texas) made a return to “honest money” a key plank of his presidential run, and the idea took hold among Tea Party conservatives outraged over the Federal Reserve’s loose monetary policies since the financial crisis. They argue that the U.S. debt now exceeds $16 trillion because the government has become too cavalier about borrowing and printing money. When the Fed prints money, gold-standard advocates say, it cheapens the value of a dollar, promotes inflation, and effectively steals money from the citizenry. In a nod to those ideas, the Republican Party’s 2012 platform calls for the creation of a commission to investigate setting a fixed value for the dollar. The gold standard “forces the U.S. to live within its means,” said investment strategist Mark Luschini. “Think of it as a person with a debit card rather than a credit card. The debit card holder can only spend what he or she has in the bank.”

What are the downsides?

A fixed link between the dollar and gold would make the Fed powerless to fight recessions or put the brakes on an overheating economy. “If you like the euro and how it’s been working, you should love the gold standard,” said economist Barry Eichengreen. Beleaguered Greece, for instance, cannot print more money or lower its interest rates because it’s a member of a fixed-currency union, the euro zone. A gold standard would put the Fed in a similar predicament. Gold supplies are also unreliable: If miners went on strike or new gold discoveries suddenly stalled, economic growth could grind to a halt. If the output of goods and services grew faster than gold supplies, the Fed couldn’t put more money into circulation to keep up, driving down wages and stifling investment.

Could the gold standard come back?

It’s very unlikely. In a University of Chicago poll this year, not one of 40 top economists surveyed supported a return to gold. The last gold standard commission, established by President Ronald Reagan, voted by a wide margin against bringing it back. The size and complexity of the U.S. economy would also make the conversion extremely difficult. Just to back the dollars now in circulation and on deposit—about $2.7 trillion—with the approximately 261 million ounces of gold held by the U.S. government, gold prices would have to rise as high as $10,000 an ounce, up from about $1,780, causing huge inflation. “It could do massive damage to the economy,” said John Makin, an economist at the American Enterprise Institute. So why the clamor for its return? Nostalgia, said economist Charles Wyplosz. “People long for a simpler age,” when the U.S. “was the dominant economy and there were no financial markets to speak of.” It’s like “getting back together with that old girlfriend,” said MarketWatch’s David Weidner. The current system may not be perfect, he says, but what people forget is that “the gold standard never works.”

Every so often, we'll reprint something from our sister publication, The Week. This is one of those times.

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Yes, You Can Put Your Christmas Decorations Up Now—and Should, According to Psychologists
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We all know at least one of those people who's already placing an angel on top of his or her Christmas tree while everyone else on the block still has paper ghosts stuck to their windows and a rotting pumpkin on the stoop. Maybe it’s your neighbor; maybe it’s you. Jolliness aside, these early decorators tend to get a bad rap. For some people, the holidays provide more stress than splendor, so the sight of that first plastic reindeer on a neighbor's roof isn't exactly a welcome one.

But according to two psychoanalysts, these eager decorators aren’t eccentric—they’re simply happier. Psychoanalyst Steve McKeown told UNILAD:

“Although there could be a number of symptomatic reasons why someone would want to obsessively put up decorations early, most commonly for nostalgic reasons either to relive the magic or to compensate for past neglect.

In a world full of stress and anxiety people like to associate to things that make them happy and Christmas decorations evoke those strong feelings of the childhood.

Decorations are simply an anchor or pathway to those old childhood magical emotions of excitement. So putting up those Christmas decorations early extend the excitement!”

Amy Morin, another psychoanalyst, linked Christmas decorations with the pleasures of childhood, telling the site: “The holiday season stirs up a sense of nostalgia. Nostalgia helps link people to their personal past and it helps people understand their identity. For many, putting up Christmas decorations early is a way for them to reconnect with their childhoods.”

She also explained that these nostalgic memories can help remind people of spending the holidays with loved ones who have since passed away. As Morin remarked, “Decorating early may help them feel more connected with that individual.”

And that neighbor of yours who has already been decorated since Halloween? Well, according to a study in the Journal of Environmental Psychology, homes that have been warmly decorated for the holidays make the residents appear more “friendly and cohesive” compared to non-decorated homes when observed by strangers. Basically, a little wreath can go a long way.

So if you want to hang those stockings before you’ve digested your Thanksgiving dinner, go ahead. You might just find yourself happier for it.

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11 Black Friday Purchases That Aren't Always The Best Deal
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Black Friday can bring out some of the best deals of the year (along with the worst in-store behavior), but that doesn't mean every advertised price is worth splurging on. While many shoppers are eager to save a few dollars and kickstart the holiday shopping season, some purchases are better left waiting for at least a few weeks (or longer).

1. FURNITURE

Display of outdoor furniture.
Photo by Isaac Benhesed on Unsplash

Black Friday is often the best time to scope out deals on large purchases—except for furniture. That's because newer furniture models and styles often appear in showrooms in February. According to Kurt Knutsson, a consumer technology expert, the best furniture deals can be found in January, and later on in July and August. If you're aiming for outdoor patio sets, expect to find knockout prices when outdoor furniture is discounted and put on clearance closer to Labor Day.

2. TOOLS

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Unless you're shopping for a specific tool as a Christmas gift, it's often better to wait until warmer weather rolls around to catch great deals. While some big-name brands offer Black Friday discounts, the best tool deals roll around in late spring and early summer, just in time for Memorial Day and Father's Day.

3. BEDDING AND LINENS

A stack of bed linens.
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Sheet and bedding sets are often used as doorbuster items for Black Friday sales, but that doesn't mean you should splurge now. Instead, wait for annual linen sales—called white sales—to pop up after New Year's. Back in January of 1878, department store operator John Wanamaker held the first white sale as a way to push bedding inventory out of his stores. Since then, retailers have offered these top-of-the-year sales and January remains the best time to buy sheets, comforters, and other cozy bed linens.

4. HOLIDAY DÉCOR

Rows of holiday gnomes.
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If you are planning to snag a new Christmas tree, lights, or other festive décor, it's likely worth making due with what you have and snapping up new items after December 25. After the holidays, retailers are looking to quickly move out holiday items to make way for spring inventory, so ornaments, trees, yard inflatables, and other items often drastically drop in price, offering better deals than before the holidays. If you truly can't wait, the better option is shopping as close to Christmas as possible, when stores try to reduce their Christmas stock before resorting to clearance prices.

5. TOYS

Child choosing a toy car.
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Unless you're shopping for a very specific gift that's likely to sell out before the holidays, Black Friday toy deals often aren't the best time to fill your cart at toy stores. Stores often begin dropping toy prices two weeks before Christmas, meaning there's nothing wrong with saving all your shopping (and gift wrapping) until the last minute.

6. ENGAGEMENT RINGS AND JEWELRY

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Holiday jewelry commercials can be pretty persuasive when it comes to giving diamonds and gold as gifts. But, savvy shoppers can often get the best deals on baubles come spring and summer—prices tend to be at their highest between Christmas and Valentine's Day thanks to engagements and holiday gift-giving. But come March, prices begin to drop through the end of summer as jewelers see fewer purchases, making it worth passing up Black Friday deals.

7. PLANE TICKETS AND TRAVEL PACKAGES

Searching for flights online.
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While it's worth looking at plane ticket deals on Black Friday, it's not always the best idea to whip out your credit card. Despite some sales, the best time to purchase a flight is still between three weeks and three and a half months out. Some hotel sites will offer big deals after Thanksgiving and on Cyber Monday, but it doesn't mean you should spring for next year's vacation just yet. The best travel and accommodation deals often pop up in January and February when travel numbers are down.

8. FOOD AND SNACK BASKETS

Gift basket against a blue background.
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Fancy fruit, meat and cheese, and snack baskets are easy gifts for friends and family (or yourself, let's be honest), but they shouldn't be snagged on Black Friday. And because baskets are jam-packed full of perishables, you likely won't want to buy them a month away from the big day anyway. But traditionally, you'll spend less cheddar if you wait to make those purchases in December.

9. WINTER CLOTHING

Rack of women's winter clothing.
Photo by Hannah Morgan on Unsplash.

Buying clothing out of season is usually a big money saver, and winter clothes are no exception. Although some brands push big discounts online and in-store, the best savings on coats, gloves, and other winter accessories can still be found right before Black Friday—pre-Thanksgiving apparel markdowns can hit nearly 30 percent off—and after the holidays.

10. SMARTPHONES

Group of hands holding smartphones.
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While blowout tech sales are often reserved for Cyber Monday, retailers will try to pull you in-store with big electronics discounts on Black Friday. But, not all of them are really the best deals. The price for new iPhones, for example, may not budge much (if at all) the day after Thanksgiving. If you're in the market for a new phone, the best option might be waiting at least a few more weeks as prices on older models drop. Or, you can wait for bundle deals that crop up during December, where you pay standard retail price but receive free accessories or gift cards along with your new phone.

11. KITCHEN GADGETS

Row of hanging kitchen knives and utensils.
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Black Friday is a great shopping day for cooking enthusiasts—at least for those who are picky about their kitchen appliances. Name-brand tools and appliances often see good sales, since stores drop prices upwards of 40 to 50 percent to move through more inventory. But that doesn't mean all slow cookers, coffee makers, and utensil prices are the best deals. Many stores advertise no-name kitchen items that are often cheaply made and cheaply priced. Purchasing these lower-grade items can be a waste of money, even on Black Friday, since chances are you may be stuck looking for a replacement next year. And while shoppers love to find deals, the whole point of America's unofficial shopping holiday is to save money on products you truly want (and love).

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