What were the factors that caused the world to move away from the Gold Standard in the 20th century?

It is mistake to see gold as some kind of bygone historical artifact or "barbarous relic" of the past as Keynes put it.

Throughout history states have variously adopted more public or less public standards of gold depending on political factors.

For example, early in the Roman Republic the aureus was an important standard of commerce, but later in the empire, under governments like that of Diocletian, gold was completely removed and replaced with paper credits and debased coinage made out of copper and other base metals.

In general, the more comprehensive and overarching the government, the more hidden the gold is.

Just because the use of gold is hidden, does not mean it is not used. Gold is always the standard of wealth, no matter how much paper and copper you use. Just because you personally do not see that use, does not mean it is not the standard. Below JFK airport in New York and below the Zurich airport are gigantic vaults filled with billions in gold that is moved back and forth to settle accounts, no different than when the gold ships used to sail back in 1900, only now the gold is moved in 747 aircraft instead of clipper ships. What has changed is the visibility of this trade, not its importance.

The gold standard was a simple, straightforward way of managing the world's money supply. Like most simple, straightforward ideas, it is utterly inadquate when confronted with a complicated real world problem.

The best answer to the question is The Atlantic summary of the problem in two graphs . Although the proponents of the gold standard praise it as a way of averting inflation, the gold standard actually condemns the economies in question to violent business cycles that result in higher inflation. As the economist article suggests, the discussion should stop here.

But there are other problems with the gold standard.

• The gold standard outsources monetary management to a countries that are lucky enough to have gold. The money supply grows in response to arbitrary discoveries of gold, and those countries get the benefit of expanding the money supply without any obligation to expand production or value. This was particularly silly during the era when the countries most likely to discover new gold were Russia and South Africa - countries that were founded on policies that were anathema to most of the world (Communism and apartheid). Take for example the unlikely to be repeated but very real example of the Spanish economic collapse; Spains possessions in the new world resulted in Spain possessing an unbelievalble amount of the world's specie. Spain managed to drive up inflation all over the world, but didn't invest the resulting wealth in any way that deepened capital. The result was a complete catastrophe for Spain, and a lot of pain for the rest of the world.

  • The gold standard might have made sense when the Bank of England used a worldwide empire to manage the global money supply according to the principles of mercantilism. I think most of the modern world rejects both mercantilism and worldwide empire. Towards teh end of the BoE's management of the gold standard, there were a number of cases where private investors were able to make astonishing profits by predicting the actions that the BoE would need to take to maintain the gold standard and betting against those actions. Those bets also increased substantially the cost of managing the gold standard, and did not benefit anyone other than the investors in question. I'm not a huge proponent of the common good, but when investors profit by acting contrary to the common good, that is a non-sustainable situation.

Commentators have made some very good points that I'd like to answer

1. My answer was not civil, and I apologize for my lack of civility; given how often I critize others, I should hold myself to a higher standard, and I failed to do so.
2. Fiat currencies can be inflated. Specie based currences will be inflated when new deposits are found. In the case of fiat based curriences, we trust that the technocrats can be insulated from populist demands. In the case of specie backed currencies, we trust that fortune and fate will cause inflation to occur at times when it will not harm the economy and in places that will be beneficial.
3. Inflation is not intrinscially bad. Inflation is a strategy can be used to excape from economic doldrums. Inflation can be used to increase employment, which is absolutely vital to a consumer based economy. Specie backed economies remove that option from the arsenal. Certainly monetary supply can be managed very badly and result in hyperinflation, but that is not an intrinsic property.
4. @Lennart Regebro points out that my answer missed a major point; that specie backed currency wasn't stupid at the time. It was the best they had.
5. @LateralFractal points out that it is possible to base the currency on things other than specie or gold. He points out the ancient sex backed currency of the temples of Ishtar. I acknowledge his point, but I refuse to discuss the inflationary/deflationary implications of sex backed currency. (Just for the record, that wasn't intended to be a pun when I typed it; I realized the implications as I was revising the sentence). There are other ways to back a currency; historical examples include spearpoints, cowrie shells, giant Iron or Sandstone slabs, etc. I think discussion of these examples is outside the scope of the question and cannot be discussed briefly. Some of these are discussed in Jack Weatherford's History of Money (I have reservations about the book as a whole, but the discussion of various currencies is in the early part of the book which is more historical), and I believe that the wikipedia page on money touches competently on some of the criteria needed for a commodity to back the cultural artifact of "money".
6. Nobody made the comment, but I feel obliged to point out that there is a currency that is not subject to inflation bitcoin. Bitcoin is not subject to inflation or deflation, but is the victim of wild swings in value. If we were serious about adopting a monetary standard that was immune from technocratic management, bitcoin would be a good alternative. But in doing so we would abandon the opportunities of money management.

Historically, the supply of gold has grown at the rate of 2% a year (through mining, new discoveries, etc.). That is too low a rate of growth to allow the world to grow at its desired pace of 3% or higher, and still maintain the price of goods at stable, to rising. (If gold, your "money supply" is growing at 2% a year, and goods at 3%, the price of goods would need to fall 1% a year on average, to compensate. This is known as "deflation," and scares most bankers and economists.) Historically, economic growth had been held hostage to new gold discoveries; e.g. with boom and bust cycles for countries like Spain.

During the 20th century, economic thinkers such as John Maynard Keynes and Milton Friedman showed that without the gold standard, it was possible to expand the money supply at a 3%-4% annual rate, in line with, and thereby supporting, global growth. This knowledge caused the United States to "overexpand" in the 1960s to finance the Vietnam War. By 1971, the U.S. could no longer keep its pledge, made in 1944 at Bretton Woods, to redeem its dollars for gold. So the U.S. let the dollar "float" against gold (find a "natural" price different from the historical $35 an ounce), thereby going off the gold standard. With the notable exception of Japan and Germany most developed world countries such as Britain and Italy were in similar straits, and went off the gold standard, along with the U.S.

I'll take a stab at this, although it really does deserve an economics stack exchange

Short reason: Population growth relative to gold supply.

Long reason:

A gold standard is another way of saying that your money supply is inelastic. Each bank note is linked to a fixed amount of gold and in theory should allow you buy that amount of gold. As gold is produced by supernova nucleosynthesis, the gold is "created" only in so far as it is mined from crust deposits and the rate of newly mined gold isn't nearly enough for the level of global economic activity.

New gold is about 4% of what's needed each year (if ~135 billion USD of new gold/year and 3.9% of ~85 trillion USD of gross world product *); and most of this gold doesn't circulate as it's required to absorb commodity shocks such as oil and secure the currencies of many central banks.

As the world population grows, the money needed to reflect transactional IOUs between people increases. Eventually the gold backing the bank notes is so small and abstract as to be effectively irrelevant (no gold in your pocket), except as a concept of redeemability that still lingers in the popular imagination today.

The break away from the gold standard (i.e. that you could in theory buy a fixed amount of gold invariant of market demand for each bank note) occurred because of the need to rapidly expand war-time debt. Which is to say, compressed and time-shifted future tax revenue ("debt") resulting in a massive spike in money supply to reflect the real world massive spike in material effort involved in war activities (i.e. people do more in a total war, at least as so far trapped liquidity is concerned).

After each world war, the money supply couldn't be contracted to a fixed ratio of gold (each note's supposed "real" value in gold) without causing deadly deflation**. The Bretton Woods agreement was not actually a gold standard but rather a lip-service to one, as only central banks had access to a fixed gold exchange (i.e. not the higher volatile market rate).

Expensive proxy wars and a rising global standard of living eventually grew the money supply beyond the ability of even central banks to meaningfully exchange gold-backed promissory notes. Hence the final vestiges were broken in the "Nixon Shock" to order to allow free floating fiat currency. The shock itself is somewhat overstated considering that alternative would have required a complete re-evaluation of the role of money and a move towards a post-growth global economy which we were not and are probably still not ready for.

The core long term driver of economic growth (money supply) is population growth; as productivity growth is trapped in an upward siphon and hence barely drives the economy relative to population growth***.

Even longer reason:

Read http://en.wikipedia.org/wiki/Gold_standard

<sub>* Despite the importance of money supply statistics, no one actually has anything more than a rough estimate of global M0 or MZM. Which should scare the shit out you.
* * Inflation makes a gold standard seem sexy, but deflation is far worse in our current economic paradigm of resource distribution; and at least hyperinflation is politically self limiting.
* * * Speculation and debt can also expand the money supply, but they eventually have to "latch onto" someone's actual production of work if they are to have any meaning in the first place. Hence their expansion of the money supply is closely related to the available global labour pool as influenced by population growth.</sub>