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

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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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Little Baby's Ice Cream
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Food
Pizza and Cricket Cake Are Just Some of the Odd Flavors You'll Find at This Philadelphia Ice Cream Shop
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Little Baby's Ice Cream

Ice cream flavors can get pretty out-there, thanks to the growing number of creative scoop shops willing to take risks and broaden their customers’ horizons beyond chocolate, vanilla, and strawberry. Intrepid foodies can cool off with frozen treats that taste like horseradish, foie gras, and avocado, while Philadelphia's Little Baby’s Ice Cream is pushing the boundaries of taste with chilly offerings like everything bagel, Maryland BBQ, ranch, and cricket cake.

Cricket-flavored ice cream, created by Philadelphia-based Little Baby's Ice Cream
Little Baby's Ice Cream

Everything Bagel-flavored ice cream, created by Philadelphia-based Little Baby's Ice Cream
Little Baby's Ice Cream

As Lonely Planet News reports, Little Baby’s Ice Cream launched its first signature “oddball” ice cream—Earl Grey sriracha—in 2011. Since then, its rotating menu has only gotten quirkier. In addition to the aforementioned flavors, customers who swing by Little Baby’s this summer can even try pizza ice cream.

The store created the savory flavor in 2011, to celebrate neighborhood eatery Pizza Brain’s inclusion into Guinness World Records for its vast collection of pizza memorabilia. The savory, Italian-esque snack is made from ingredients like tomato, basil, oregano, salt, and garlic—and yes, it actually tastes like pizza, Little Baby’s co-owner Pete Angevine told Lonely Planet News.

Pizza-flavored ice cream, made by Philadelphia-based Little Baby's Ice Cream
Little Baby's Ice Cream

“Frequently, folks will see it on the menu and be incredulous, then be convinced to taste it, giggle, talk about how surprised they are that it really tastes just like pizza … and then order something else,” Angevine said. “That’s just fine. Just as often though, they’ll end up getting a pizza milkshake!”

Little Baby’s flagship location is in Philadelphia's East Kensington neighborhood, but customers can also sample their unconventional goods at additional outposts in West Philadelphia, Baltimore, and a pop-up stand in Washington, D.C.’s Union Market. Just make sure to bring along a sense of adventure, and to leave your preconceived notions of what ice cream should taste like at home.

[h/t Lonely Planet]

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Warby Parker
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Space
Warby Parker Is Giving Away Free Eclipse Glasses in August
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Warby Parker

When this year’s rare “all-American” total solar eclipse comes around on August 21, you’ll want to be prepared. Whether you’re chasing the eclipse to Kentucky or viewing it from your backyard, you’ll need a way to watch it safely. That means an eclipse filter over your telescope, or specially designed eclipse glasses.

For the latter, you can just show up at your nearest Warby Parker, and their eye experts will hand over a pair of eclipse glasses. The stores are giving out the free eye protectors throughout August. The company’s Nashville store is also having an eclipse party to view the celestial event on the day-of.

Get your glasses early, because you don’t want to miss out on this eclipse, which will cross the continental U.S. from Oregon to South Carolina. There are only so many total solar eclipses you’ll get to see in your lifetime, after all.

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