The Death of the Gold Standard

--- by D. Petkovski ---

The gold standard is a monetary system where a country’s currency or paper money has a value directly linked to gold.

Investopedia, What is the Gold Standard?

Throughout a major part of human history, gold was the only globally recognized unit of account.

And it still has that status, as every system/country/empire agrees on its value. However, today we also use other things as currency.

In this post, I’ll focus on the recent history of gold as a reserve currency.

Table of Contents

The Gold Standard

We will start with the Gold Standard Act of 1900, which made the US dollars exchangeable to gold.

People wouldn’t have to keep their wealth in gold, but could have it conveniently stored in a bank. For this, they’d receive banknotes, which they could conveniently use in daily life.

If at any moment a person wants his gold, he can enter a bank, provide $USD and get his gold back.

The gold was pegged at $20 per ounce.

This was possible because the amount of paper money reflected the amount of gold in reserves.

The Centralization of Power

Unfortunately, history continuously teaches us that we can’t trust a government to keep promises and provide personal freedom in tough times.

Namely:

1933: Confiscation of the Citizens’ Gold

The United States got into a gold deficit during the Great Depression. So the government decided that “hoarding of gold” is worsening the crisis.

And just like that, the government seized all the citizens’ gold.

This literally happened in the land of the free.

With the Executive Order 6102, since 1933, officially, you weren’t allowed to have gold. Your country needed it. This forced all Americans to exchange their gold for dollars.

The price per ounce increased from 20$ to 35$. Favorable to deposit, unfavorable (and illegal) to withdraw.

This started the centralization of the gold standard in recent history.

1944: Confiscation of the World’s Gold

After the two world wars, most of the “west” was in total economic ruin.

To support international economic growth and foreign exchange stability, the world needed a global and reliable monetary management system.

This lead to the negotiation of the Bretton Woods Agreement in 1944, by delegates from 44 countries. It was agreed that the $USD will be pegged to gold at a rate of $35/oz, and all other currencies will be pegged to the US dollar.

I won’t go in the details here, but you can read about the World Bank and the International Monetary Fund – two institutions that were created to facilitate this process.

With over 75% of the world’s gold reserves, the United States took this opportunity to further position itself as the superpower.

Think about it…

Only the US could issue units of account and everyone else pegged to it.

The Abuse of the Reserve Currency

Imagine having the ability to create money.

Well, now that your currency is the global standard, in a way, you can…

The ease with which paper money can be created, by both legitimate authorities and counterfeiters, has led both to a temptation in times of crisis such as war or revolution to produce paper money which was not supported by precious metal or other goods, thus leading to Hyperinflation and a loss of faith in the value of paper money.

Wikipedia, Banknote – History of counterfeiting and security measures

As any time in history, eventually taxes weren’t enough to fund the government spending.

Domestic programs aside, the Vietnam war itself costed the US more than $1 trillion in today’s money.

Irresponsible spending is always followed by reckless creation of money, thus devaluing the currency. The US had to increase the price of gold again – this time to $42/oz, making every dollar in circulation worth less.

Other countries took note and didn’t want to be the last holding a bag of worthless $USD.

So they started to demand their gold back. Germany, Switzerland, and France were the first to do this.

The gold reserves were depleting.

The US found itself in a difficult economic situation, and coupled with the pressure from other countries, “The Nixon Shock” followed.

In 1971, the US unilaterally terminated the convertibility of $USD to gold.

This was the end of the Bretton Woods system.

Here’s an excerpt from president’s speech, signifying the death of the gold standard:

“Nothing is so permanent as a temporary government program”

Milton Friedman

Couldn’t be more true.

Conclusion

Don’t get your wealth diluted through inflation by doing nothing.

Take custody of your money and join the inevitable movement.

I published a part 2 of this post: The Death of the Gold Standard – The Aftermath.

Author

D. Petkovski

📓 The Author Husband & Father
Software Engineer StrengthCentric
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