Tuesday, July 9, 2024

Is Us Currency Backed By Gold

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History Of Fiat Money In The Us


The U.S. dollar is considered to be both fiat money and legal tender, accepted for private and public debts. Legal tender is basically any currency that a government declares to be legal. Many governments issue a fiat currency, then make it legal tender by setting it as the standard for debt repayment.

Earlier in U.S. history, the countrys currency was backed by gold . The federal government stopped allowing citizens to exchange currency for government gold with the passage of the Emergency Banking Act of 1933. The gold standard, which backed U.S. currency with federal gold, ended completely in 1971 when the U.S. also stopped issuing gold to foreign governments in exchange for U.S. currency.

Since that time, U.S. dollars are known to be backed by the full faith and credit of the U.S. government, legal tender for all debts, public and private but not redeemable in lawful money at the United States Treasury or at any Federal Reserve Bank, as printing on U.S. dollar bills used to claim. In this sense, U.S. dollars are now legal tender, rather than lawful money, which can be exchanged for gold, silver, or any other commodity.

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When Was The Gold Standard Introduced

The gold standard was first introduced in Germany in 1871, and by 1900 most developed nations, including the US, were using it.

The system remained popular for decades, with governments worldwide working together to make it successful, but when World War I broke out it became difficult to maintain. Changing political alliances, higher debt and other factors led to a widespread lack of confidence in the gold standard.

How Is Gold Money Backed

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

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Alternative To The Gold Standard

In 1960, the U.S. held $19.4 billion in gold reserves, including $1.6 billion in the International Monetary Fund. That was enough to cover the $18.7 billion in foreign dollars outstanding.

As the U.S. economy prospered, Americans bought more imported goods and paid in dollars. This large balance of payments deficit worried foreign governments that the U.S. would no longer back up the dollar in gold.

The Soviet Union had become a large oil producer. It was accumulating U.S. dollars in its foreign reserves since oil is priced in dollars. The Soviet Union deposited its dollar reserves in European banks, and these became known as “eurodollars.”

By the 1970s, the United States stockpile of gold had declined. Double-digit inflation reduced the eurodollar’s value, and more and more banks started redeeming their holdings for gold. The U.S. could no longer meet this growing obligation.

The U.S. no longer has enough gold at current rates to pay off its debt owed to foreign investors. Even when gold hit its peak price of $1,896 an ounce in September of 2011, there wasn’t enough gold for the U.S. to pay off its debt.

The dollar/gold relationship was changed to $38 per ounce during the Nixon administration. The Fed could no longer redeem dollars with gold, which made the gold standard meaningless.

The Theory Of Gdp Backing The Dollar Is Flawed

$20 Dollar Gold Certificate. This is when the paper money ...

But the reality with this government theory of GDP backing the dollar is flawed to begin with. The dollar acts as a medium of exchange and is only valuable because it can be exchanged for goods and services. It is ones production that is the actual backing of the dollar, not the piece of paper itself.

Take another look at that dollar bill you pulled out.

Do you need further proof that U.S. dollars are debt? What does it say at the very top of the dollar bill? It says Federal Reserve Note.

What is the definition of the word note?

Note: A written promise to pay a debt.

What is this debt that you, the one who is possessing these dollars, has to pay? I thought your production was something you got to keep? But according to what you are being paid for your labor, i.e. dollars you are accepting as payment, are nothing but IOUs.

Since you cant redeem these IOUs for lawful money any longer, what makes you think that these pieces of paper called notes that have 38 short years of existence at the time of this article are going to maintain your wealth in the years to come?

What are you doing about it today to protect yourself? Perhaps a little insurance with gold and silver, what used to be our money and back our money makes sense?

The book, Buy Gold and Silver Safely is a good start. Chapter 4 also happens to be a good outline to the future. No one else is going to give you this kind of information.

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The Gold Standard Explained

Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact.

The gold standard is a currency measurement system that uses gold as a way to set the value of money. It ensures that currency under a gold-standard system can be exchanged for gold. The gold standard signifies an agreement between society and its monetary institutions that the currency they spend and earn is a stand-in for gold.

To fully grasp the gold standard, it’s important to understand how gold has been used for centuries to set the standard for currency value, why it’s fallen out of favor, and its pros and cons.

What Are Bullion Exchanges

Bullion exchanges mean that a government will buy bullion from producers in exchange for fiat currency. A bullion exchange might mean that the price of gold in a country depends on government regulators and not a free market. It might also mean that most local producers rely on the government to maintain their livelihoods.

For example, in the Philippines, it is illegal to buy and sell gold unless youre an authorized dealer from the central bank. Filipinos need to look for gold items in pawnshops and jewelry stores that they can melt into coins and bars to keep for a rainy day, but even then, its a pointless exercise. Filipinos cant sell gold, and no one would appraise their product unless they surrender it to the Bangko Sentral ng Pilipinas.

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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.

What Are The Downsides

Money Vs Gold backed digital currency

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 its 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 its 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 couldnt put more money into circulation to keep up, driving down wages and stifling investment.

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What Gold Advocates Ignore

Those who advocate for a gold or similar standard often use the argument that fiat currencies aren’t really “worth” anything, since there isn’t anything tangible that underpins its value. That’s really not a very accurate description of a fiat currency, versus a gold standard. Simply put, the value of any currency, whether a commodity or a fiat currency, is only relative to what people think it’s worth.

And gold hasn’t exactly been stable or reliable in recent years:

Gold Price in US Dollars data by YCharts.

What does that chart tell us? In times of uncertainty, people hoard gold. You can see it in the early ’80s oil crisis and recession and the most recent financial crisis, when gold prices soared, only to fall sharply once the overall economic environment improved.

This situation is largely what led Franklin D. Roosevelt to sever the convertibility of U.S. currency and debt into gold during the Great Depression. Under the gold standard , hoarding gold had a direct impact on monetary flow, hurting commerce and exacerbating recessions. By severing the link between gold reserves and currency, the Federal Reserve is better able to combat major economic shocks to the economy.

Think gold is a great investment? Historically, it really hasn’t been:

Gold Price in US Dollars data by YCharts.

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.

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Only One Currency Is Still Backed By Gold

Thats the only way to describe the reaction that future historians will have when they look back and study the utter perversion that is our global financial system.

We live in a time when a tiny handful of people have their fingers on a button that can conjure trillions of dollars, euro, yen, and renminbi out of thin air. In the United States, it comes down to one man. Just one.

With a single decision, he controls the lever that dominates the entire economy. When you control the money, you control everything financial markets, consumer prices, risk perceptions, investment habits, savings rates, hiring decisions, pay raises, sovereign debt, housing starts, etc. One man.

This irrational, arrogant system presupposes by design that a central banker is smarter than everyone else that markets are incapable of determining appropriate risk and value that he is more effective at allocating our time, capital, and labour than we are.

Future historians will probably also be dumbfounded when they see how long people allowed worthless, unbacked fiat paper to pass as money. Its extraordinary that most people today happily accept a digital abstraction of paper currency controlled by a single individual as valuable.

Meanwhile, M2 money supply at last count was about $9.8 trillion as of March 12, 2012. This means that roughly 4.46% of US dollars in circulation are backed by gold, the rest backed by false promises and goodwill.

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Is Us Currency Still Backed By Gold

" Why New Gold Backed Currencies Reset"  by Ron Giles

Federal Reserve notes are not redeemable in gold, silver, or any other commodity. Federal Reserve notes have not been redeemable in gold since January 30, 1934, when the Congress amended Section 16 of the Federal Reserve Act to read: “The said notes shall be obligations of the United Statesâ¦.They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.” Federal Reserve notes have not been redeemable in silver since the 1960s.

The Congress has specified that Federal Reserve Banks must hold collateral equal in value to the Federal Reserve notes that the Federal Reserve Bank puts in to circulation. This collateral is chiefly held in the form of U.S. Treasury, federal agency, and government-sponsored enterprise securities.

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How Is Money Valued Today

Is currency backed by gold? The simple answer is no.

Today, money is worth whatever people think its worth. And that can be dangerous. One of my friends from Venezuela recently told me that she could buy food for months with a single one-ounce silver coin.

Of course, Venezuelas devastating food shortages mean that she may not get the chance, but her story proves the potentially destructive power of fiat currency.

Essentially, todays non-gold standard is a monetary version of the Greater Fool Theory will someone buy your dollars or euros or pounds for what you think theyre worth?

While some foreign currencies including the dirham are pegged or essentially pegged to the US dollar, the US dollar is not pegged to anything. Countries around the world have tied the fate of their currency, and their populations welfare, to a currency they dont control merely on the basis that the United States will never fail.

Im not one of those guys telling you that the US dollar is tomorrows toilet paper, but on a long-term trend the idea of simply blindly following a central bank and its destructive policies seems dangerous. After all, people have historically flocked to gold when they dont trust the local bank to keep their money safe.

Recent examples in Cyprus and Argentina have demonstrated that not only are the actual currencies at risk for loss, but the banks themselves can be, too.

Some people are apparently trying to change that

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.

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What’s 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.

Politicians Are Clueless And Only Do One Thing Create Bills For More Spending

Gold-Backed Chinese Yuan to Replace USD as Reserve Currency

Since politicians dont get elected by raising taxes, that leaves only one viable answer to pay for the bills Congress creates printing it or creating credit. Or in other words, DEBT. Its a nice legacy that our generation is leaving future generations isnt it?

The George W. Bush administration was spending out of control and President Obamas administration is piling on debt at an even more alarming rate to prevent the system from collapsing mind you. Any bets on their success? The system will collapse as long as government keeps spending. Its just a matter of when.

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