Heres Why The Us No Longer Follows A Gold Standard
Every few years, the idea of the gold standard becomes a hot topic. And why not? Gold is shiny and valuable, and people like it.
A gold standard means the value of a countrys currency is linked to a specified amount of gold. Under the gold standard, governments needed to be ready and willing to buy and sell gold to anyone at the set price.
You May Like: How Much Is 10k Gold Worth
Silver And Gold: A New Standard
With silver in greater abundance relative to gold, a bimetallic standard was adopted in 1792. While the officially adopted silver-to-gold parity ratio of 15:1 accurately reflected the market ratio at the time, after 1793, the value of silver steadily declined, pushing gold out of circulation, according to Gresham’s law.
The issue would not be remedied until the Coinage Act of 1834, and not without strong political animosity. Hard-money enthusiasts advocated for a ratio that would return gold coins to circulation, not necessarily to push out silver, but to push out small-denomination paper notes issued by the then-hated Bank of the United States. A ratio of 16:1 that blatantly overvalued gold was established and reversed the situation, putting the U.S. on a de facto gold standard.
Are There Currencies Backed By Gold
If youre here, you likely know your dollar, euro, or pound sterling is little more than paper money
And you know, instinctively, that this is not a good situation for your hard-earned cash.
Why? Because these currencies are not backed by a gold standard , except for the trust people put into the stability of those currencies.
That might matter little when there is plenty of confidence in that paper, and the government backing it.
But just the events of 2020 alone should destroy any remaining confidence in the US dollar, US government, and US Federal Reserve.
That is because $3 trillion was conjured out of thin air in just the first three months after COVID-19 hit the US.
And at the same time, the economy shrank. With more cash, and fewer goods and services in the economy, it doesnt take a genius to think, maybe the value of the dollar isnt so stable.
National debt is now more than 25% larger than the entire US economy.
Where is the safe haven so that your wealth doesnt simply disappear?
Naturally, you want a backup plan.
Recommended Reading: What Is The Best Gold To Buy In Jewelry
When Was The Gold Standard Replaced And What Replaced It
The demise of the gold standard began as World War II was coming to an end.
At this time, the leading western powers met to develop the Bretton Woods agreement, which ultimately became the framework for the global currency markets until 1971.
The Bretton Woods agreement was born at the UN Monetary and Financial Conference, held in Bretton Woods, New Hampshire, in July 1944. Under the deal, currencies were pegged to the price of gold, and the US dollar was seen as a reserve currency linked to the price of gold. This meant that all national currencies were valued in relation to the US dollar since it had become a dominant reserve currency.
Despite valiant efforts from governments at the time, the Bretton Woods agreement led to overvaluation of the US dollar, which caused concerns over exchange rates and their ties to the price of gold.
From the 1970s to today, most countries have run on a system of fiat money, which is money issued by the government that is not backed by a commodity. The value of money is set by supply and demand for paper money, as well as supply and demand for other goods and services in the economy. The prices for those goods and services, including gold and silver, can fluctuate based on market conditions.
The Rise Of The Gold Standard
The gold standard is a monetary system in which paper money is freely convertible into a fixed amount of gold. In other words, in such a monetary system, gold backs the value of money. Between 1696 and 1812, the development and formalization of the gold standard began as the introduction of paper money posed some problems.
The U.S. Constitution in 1789 gave Congress the sole right to coin money and the power to regulate its value. Creating a united national currency enabled the standardization of a monetary system that had up until then consisted of circulating foreign coin, mostly silver.
Also Check: Where Is Gold Coast Casino In Las Vegas
Building A Customer Base
UTIMCO could be a Texas depository customer, but has placed two conditions on bringing its holdings to Texas. First, it mustnt cost more to store gold in Texas than in New York and second, the depository must be a member of COMEX, a metals exchange with standards that ensure the quality of all gold transferred between accounts. Based in the U.S. but used by traders around the globe, COMEX currently licenses eight vault facilities, all within 150 miles of New York City.
COMEX equivalents do exist. The London Bullion Market Association is similar to COMEX and generally handles more international transactions. Theres also the smaller International Commodity Exchange in the U.S.
LSTA Chairman Matt Ferris noted at a July press conference that his company plans to work with its subcontractors on providing COMEX levels of liquidity and quality, especially for large institutions. Smelker adds the absence of a COMEX membership shouldnt be a stumbling block.
COMEX typically serves larger institutional customers who invest in and trade precious metals, Smelker says. But private depositories can also hold metal for many other smaller investors, industrial users, coin dealers and those in the jewelry industry. There are thousands of small to mid-range metal and coin dealers in the U.S. who are not members of the COMEX.
Who could comprise the Texas depositorys customer base?
And its not just high-powered investors who might use the depository.
Think What Were Doing Makes Senseget To Know Us More
Join over 100,000 subscribers who receive our free Notes From the Field newsletterwhere youll get real boots on the ground intelligence as we travel the world and seek out the best opportunities for our readers.
Its free, its packed with information, and best of all, its short theres no verbose pontification here we both have better things to do with our time.
And while I appreciate all the visitors who stop by our website, I provide special bonuses to our email subscribers including free premium intelligence reports and other valuable content that I only share with them.
Its definitely worth your while to sign-up, and if you dont like it, you can unsubscribe at any time.
Recommended Reading: Where Do You Buy Gold And Silver Bars
Could The Gold Standard Come Back
Itâs 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 depositâabout $2.7 trillionâwith 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.
âIt could do massive damage to the economy,â said John Makin, an economist at the American Enterprise Institute. So why the clamor for its return? Nostalgia, said economist Charles Wyplosz. âPeople long for a simpler age,â when the U.S. âwas the dominant economy and there were no financial markets to speak of.â Itâs like âgetting back together with that old girlfriend,â said âs David Weidner. The current system may not be perfect, he says, but what people forget is that âthe gold standard never works.â Every so often, we’ll reprint something from our sister publication, The Week. This is one of those times.
Gold Vs The Us Dollar
As World War II was coming to an end, the leading Western powers met to develop the Bretton Woods Agreement, which would be the framework for the global currency markets until 1971. Within the Bretton Woods system, all national currencies were valued in relation to the U.S. dollar, which became the dominant reserve currency. The dollar, in turn, was convertible to gold at the fixed rate of $35 per ounce. The global financial system continued to operate upon a gold standard, albeit in a more indirect manner.
The agreement has resulted in an interesting relationship between gold and the U.S. dollar over time. Over the long term, a declining dollar generally means rising gold prices. In the short term, this is not always true, and the relationship can be tenuous at best, as the following one-year daily chart demonstrates. In the figure below, notice the correlation indicator which moves from a strong negative correlation to a positive correlation and back again. The correlation is still biased toward the inverse though, so as the dollar rises, gold typically declines.
|Figure 1: USD Index vs. Gold Futures|
Don’t Miss: Is The Dollar Backed By Gold
Effects Of The 19th Century Gold Rush
Up until 1850 only Britain and a few of its colonies were on the gold standard, with the majority of other countries being on the silver standard. France and the United States were two of the more notable countries on the bimetallic standard. France’s actions in maintaining the French franc at either 4.5 g fine silver or 0.29032 g fine gold stabilized world gold-silver price ratios close to the French ratio of 15.5 in the first three quarters of the 19th century by offering to mint the cheaper metal in unlimited quantities â gold 20-franc coins whenever the ratio is below 15.5, and silver 5-franc coins whenever the ratio is above 15.5. The United States dollar was also bimetallic de jure until 1900, worth either 24.0566 g fine silver, or 1.60377 g fine gold the latter revised to 1.50463 g fine gold from 1837 to 1934. The silver dollar was generally the cheaper currency before 1837, while the gold dollar was cheaper between 1837 and 1873.
- Portugal and several British colonies commenced with the gold standard in the 1850s and 1860s
- France was joined by Belgium, Switzerland and Italy in a larger Latin Monetary Union based on both the gold and silver French francs.
- Several international monetary conferences during the 1860s began to consider the merits of an international gold standard, albeit with concerns on its impact on the price of silver should several countries make the switch.
Why Did The Dollar Stop Being Backed By Gold
So why did the dollar stop being backed by gold? From 1879 to 1933, the US dollar was backed by goldin other words, you could exchange paper dollars for gold coins of equal value, and the US government guaranteed that you could do so. But in 1933, the US government took this practice off the books, and since then, the dollar has been floating freely in terms of its value in relation to precious metals like gold and silver. Lets take a look at why the US stopped backing its currency with gold and what that means for you today.
You May Like: Is Tinder Gold Worth It
What Is The Gold Standard
Marcus Reeves is a writer, publisher, and journalist whose business and pop culture writings have appeared in several prominent publications, including The New York Times, The Washington Post, Rolling Stone, and the San Francisco Chronicle. He is an adjunct instructor of writing at New York University.
The gold standard is a monetary system where a country’s currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.
The gold standard is not currently used by any government. Britain stopped using the gold standard in 1931, and the U.S. followed suit in 1933, finally abandoning the remnants of the system in 1973. The gold standard was completely replaced by fiat money, a term to describe currency that is used because of a government’s order, or fiat, that the currency must be accepted as a means of payment. In the U.S., for instance, the dollar is fiat money, and for Nigeria, it is the naira.
Example Of Fiat Money Gone Wrong: Hyperinflation
The African nation of Zimbabwe provided an example of the worst-case scenario in the early 2000s. In response to serious economic problems, the country’s central bank began to print money at a staggering pace, resulting in hyperinflation.
Experts suggest the currency lost 99.9% of its value during this time. Prices rose rapidly and consumers were forced to carry bags of money just to purchase basic staples. At the height of the crisis, the Zimbabwe government was forced to issue a 100-trillion Zimbabwean dollar note. Eventually, foreign currencies were used more widely than the Zimbabwean dollar.
President Nixon Abolishes The Gold Standard
On August 15, 1971, in an effort to combat inflation, President Richard Nixon announced that he was taking the United States off of what is known as a gold standard. This meant that dollars would no longer be convertible into gold. This change led to a number of significant changes in our monetary system and way of life over time. However, it has not always been easy for people to understand why or how these changes took place, we are going to explore exactly why gold backed currency disappeared from America, and how it affects us today!
Many believe that when President Nixon took us off of a gold standard that it was bad, because it meant that our currency would no longer be tied to something real. However, while it may have seemed like a good idea at first, there are several reasons why removing us from gold actually created some very serious problems! Today were going to explore exactly what led up to Nixons decision and how his actions changed American money forever. Well also look at how these changes affected our economy and business world in general and even found their way into popular culture as well!
Whats The Value Of Commodity
Fundamentally theres no value to the currency as its still fiat paper garbage with no real value and isnt backed 100% by anything with actual value.
With this being said, its important to recognize how currencies function and recognize the benefits to commodity-correlated currencies to spare the detail in this article and the complexities Ill just keep it simple: Commodity-Correlated Currencies benefit from rising commodity-prices, and thus they are not as at-risk of inflation as their currencies are hedged by the production & sale of the commodities in their country.
There is no free lunch in this equation though Commodity-Correlated currencies experience increased volatility, as in economic downturns they, in the short-term, often go down in relation to non-commodity correlated currencies due to a declining price in commodities due to a lack of demand in said commodities.
Personally I prefer to keep gold/silver and commodity-correlated currencies as cash-equivalents to US dollars as I believe the US government and dollars future, in the long-term, and I suspect there will be dollar inflation in due time, which means Id rather hold other currencies instead of dollars, as the real-value of those currencies are less exposed to inflation over-all and I expect inflation to be worse in dollars compared to many of those currencies.
Don’t Miss: How Much Is Xbox Live Gold For 1 Month
Why Is Gold In Debate Again
Libertarian Rep. Ron Paul 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 Reserves 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 Partys 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.
Recommended Reading: Kay Jewelers Ring For 19.99
How The Gold Standard Works
Money depends on trustthe faith that it will hold its value so that, when the time comes to spend it, it will be accepted without question in exchange for what the holder expects it to be worth. Inflation eats away at that value.
In modern times, governments are often a culprit behind inflation. Since they enjoy a monopoly on printing money, they can issue new currency at virtually no cost. But governments are run by vote-seeking politicians, who might print more money to juice short-term growth needed to win re-election, inadvertently causing inflation to flare up later. This quandary isnt theoretical, and has happened with surprising frequency throughout history. To cite a recent, prominent example, US president Richard Nixon bent to this temptation during his 1972 re-election campaigncontributing to the breakout of inflation that ravaged the American economy throughout the 1970s and early 1980s.
Theres a seemingly easy fix: Take the power of money creation out of the hands of politicians. According to the monetarist theory popularized by economist Milton Friedman in the 1970s, preventing inflation requires fixing the supply of money. The gold standard, by limiting the dollars the government can print to the weight of gold it holds in reserves, is one way of doing so.
You May Like: How Do I Sell My Gold