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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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Animals
Why Tiny 'Hedgehog Highways' Are Popping Up Around London
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Hedgehogs as pets have gained popularity in recent years, but in many parts of the world, they're still wild animals. That includes London, where close to a million of the creatures roam streets, parks, and gardens, seeking out wood and vegetation to take refuge in. Now, Atlas Obscura reports that animal activists are transforming the city into a more hospitable environment for hedgehogs.

Barnes Hedgehogs, a group founded by Michel Birkenwald in the London neighborhood of Barnes four years ago, is responsible for drilling tiny "hedgehog highways" through walls around London. The passages are just wide enough for the animals to climb through, making it easier for them to travel from one green space to the next.

London's wild hedgehog population has seen a sharp decline in recent decades. Though it's hard to pin down accurate numbers for the elusive animals, surveys have shown that the British population has dwindled by tens of millions since the 1950s. This is due to factors like human development and habitat destruction by farmers who aren't fond of the unattractive shrubs, hedges, and dead wood that hedgehogs use as their homes.

When such environments are left to grow, they can still be hard for hedgehogs to access. Carving hedgehog highways through the stone partitions and wooden fences bordering parks and gardens is one way Barnes Hedgehogs is making life in the big city a little easier for its most prickly residents.

[h/t Atlas Obscura]

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Big Questions
Where Should You Place the Apostrophe in President's Day?
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Happy Presidents’ Day! Or is it President’s Day? Or Presidents Day? What you call the national holiday depends on where you are, who you’re honoring, and how you think we’re celebrating.

Saying "President’s Day" infers that the day belongs to a singular president, such as George Washington or Abraham Lincoln, whose birthdays are the basis for the holiday. On the other hand, referring to it as "Presidents’ Day" means that the day belongs to all of the presidents—that it’s their day collectively. Finally, calling the day "Presidents Day"—plural with no apostrophe—would indicate that we’re honoring all POTUSes past and present (yes, even Andrew Johnson), but that no one president actually owns the day.

You would think that in the nearly 140 years since "Washington’s Birthday" was declared a holiday in 1879, someone would have officially declared a way to spell the day. But in fact, even the White House itself hasn’t chosen a single variation for its style guide. They spelled it “President’s Day” here and “Presidents’ Day” here.


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Maybe that indecision comes from the fact that Presidents Day isn’t even a federal holiday. The federal holiday is technically still called “Washington’s Birthday,” and states can choose to call it whatever they want. Some states, like Iowa, don’t officially acknowledge the day at all. And the location of the punctuation mark is a moot point when individual states choose to call it something else entirely, like “George Washington’s Birthday and Daisy Gatson Bates Day” in Arkansas, or “Birthdays of George Washington/Thomas Jefferson” in Alabama. (Alabama loves to split birthday celebrations, by the way; the third Monday in January celebrates both Martin Luther King, Jr., and Robert E. Lee.)

You can look to official grammar sources to declare the right way, but even they don’t agree. The AP Stylebook prefers “Presidents Day,” while Chicago Style uses “Presidents’ Day.”

The bottom line: There’s no rhyme or reason to any of it. Go with what feels right. And even then, if you’re in one of those states that has chosen to spell it “President’s Day”—Washington, for example—and you use one of the grammar book stylings instead, you’re still technically wrong.

Have you got a Big Question you'd like us to answer? If so, let us know by emailing us at bigquestions@mentalfloss.com.

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