The Evolution of Fiat Money in the United States

The Fed was formed in 1913

The Federal Reserve System, often referred to as the Fed, was indeed established in 1913. It is the central banking system of the United States and plays a crucial role in the country’s monetary and financial stability. The Fed was created in response to a series of financial panics and economic downturns that occurred in the late 19th and early 20th centuries. Its primary objectives are to stabilize prices, moderate long-term interest rates, and promote maximum sustainable employment.

The Federal Reserve System consists of the Board of Governors, located in Washington, D.C., and twelve regional Federal Reserve Banks located in major cities across the United States. The Federal Reserve is not part of the Federal Government, has no reserves, and is not a bank. The Federal Reserve has shareholders and is owned by other banks. Regardless the Fed had an important role in the evolution of fiat money in the United States today.

The gold standard and what happened in 1933 leads to fiat money

The original gold standard was in effect in the United States up until 1933. Up to this point, countries agreed to convert paper money into a fixed amount of gold. Our dollars were backed by gold, obviously not the case today. Since the global gold supply grows only slowly, having such a gold standard would theoretically hold government overspending and inflation in check. During The Great Depression in 1929, President Roosevelt was faced with decreasing unemployment, raising wages, and a stagnant money supply. In 1933, Executive Order 6102 was signed and forbid the hoarding of gold coin, gold bullion, and gold certificates within the continental United States and treated as a criminal offense. Gold was turned in and seized at $20.67 per troy ounce with exceptions for some jewelry and collector’s coins. The order outlawed the ownership of gold and even threatened huge fines and possible jail sentences. It allowed the government to stimulate more by having the ability to print more money.

Up until the late 1920s via the Federal Reserve Act of 1913, Federal Reserve Notes issued required a 40% gold backing. But by the late 1920s, the Federal Reserve was almost at the limit of allowable credit of their notes that could be backed by gold in its possession. The Fed had increased the money supply during the Depression. Something had to be done. The Gold Reserve Act of 1934 made gold clauses unenforceable and authorized the president to establish the gold value of the dollar by proclamation.

This act ratified the previous Executive Order 6102 which required almost all gold to be exchanged for paper currency. President Roosevelt changed the statutory price of gold to $35 per troy ounce. This devalued the gold-based dollar and instantly gave the government a $14.33 profit per troy ounce of gold collected due to Executive Order 6102. The gold standard was replaced by semi-fiat money. Currency was now used because of a government’s order, or fiat. This fiat currency must now be accepted as a means of payment. No gold coins were produced by the US from 1933 to 1986. Executive Order 6102 was very relevant to the evolution of fiat money.

International monetary agreements set up by The Bretton Woods Agreement

The Bretton Woods Agreement, also known as the Bretton Woods system, refers to a set of international monetary agreements that were established in July 1944 during the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire, USA. The main objective of the Bretton Woods Agreement was to create a stable international monetary system after the devastation of World War II. The conference aimed to address the economic chaos that occurred during the interwar period, including the Great Depression and the breakdown of the gold standard.

Key outcomes of the Bretton Woods Agreement were fixed exchange rates, The International Monetary Fund (IMF), the World Bank, and convertibility. Convertibility referred to member countries agreeing to maintain the convertibility of their currencies into US dollars and gold, which provided confidence in the stability of the system. The system ultimately collapsed in the early 1970s when the United States decided to abandon the gold convertibility of the US dollar. This event is known as the Nixon Shock. The Nixon Shock sets the stage for a full fiat currency system.

President Richard Nixon ends the Gold Standard in 1971 “temporarily”

In 1964 gold certificates were legalized again. The Treasury told coin collectors that they were no longer breaking the law if they owned gold certificates issued before January 30, 1934. Treasury records showed there were roughly $19 million gold certificates unaccounted for. The new rules did not mean these certificates were legal currency or could even be redeemed in gold. The Government simply stated that they were willing to exchange gold certificates for other United States currency.

In 1971 the world economy was suffering from sluggish business and slow growth. The United States could no longer meet its growing financial obligations including backing some of its dollar-denominated currency with gold. The money supply needed to be expanded and businesses needed a big boost. President Richard Nixon no longer allowed the Fed to redeem dollars with gold as Bretton Woods was imploding. Countries like France demanded gold instead of dollars. The US didn’t have the gold to meet foreign country exchange demand.

On August 15, 1971, Nixon announced his New Economic Policy. The gold standard officially ended completely and gold was revalued at $38 per troy ounce. This marked the beginning of the end for the Bretton Woods system of fixed exchange rates established at the end of World War II. The gold standard was abandoned for foreign currency exchange. The full fiat currency experiment was started. The total elimination of the gold standard in 1971 opened the floodgates for the unlimited debt and monetary expansion through printed money that we are seeing today. We are still on that “temporary” plan today.

President Gerald Ford allows US citizens to own gold again

President Gerald Ford repealed a bill and legalized private ownership of gold coins, bars, and certificates. This act of Congress, Public Law 93-373, went into effect on December 31, 1974, and by 1975 Americans could again freely own and trade gold. Millions of gold coins sent out of the country in the 1930s came flooding back into the US. Some of the only gold coins being made at that time were the Krugerrands and the Mexican Gold Peso. In 1986, the United States Mint began producing the Gold American Eagle. Most every other major country followed with a coin issued by their government mint.

Without a gold standard today, the global debt situation is beyond fixable

Since Germany after World War I decided to try and pay for the war by printing currency, it’s progressed, expanded exponentially, and has created the biggest debt bubble 100 years in the making. Global debt has even doubled since the Great Financial Crisis in 2006 from $125 trillion to $300 trillion. The price of gold peaked in 2011 at $1920 and has retained its value for the last decade. When gold reflects all of the money that has been created out of thin air, the price of gold will be significantly higher than where we are today.

The past decade has been one of fantasy and fake money. Some investors were fortunate enough to take advantage of overvalued stock, bond, and property markets through abnormally low interest rates, central banking money printing, and fake money backed by nothing but debt. Investors now are wealthier than ever. Consider we are at the top of a cliff, at the edge. Investors are more confident than ever looking at the paper statements produced by their financial institution but that confidence is waning. There is still plenty of fake money floating around but investors are cautious. The pandemic and all of its liquidity have blown the bubble up to an even bigger degree. Greed keeps investors in, fear will have them heading for the exits all at the same time.

How quickly we forget the precipice in 1929, 1973, 1987, 2000, and 2007. A debt problem cannot be solved with more debt. Investors are playing with their nest egg, their life savings if they think central bankers will save them again. History has shown us that money printing is a useless exercise where losses of 75% to 99% are possible and have happened. Since the Fed was created, the US is in recession about half of the time. Not every investor has 25 years to see if the markets eventually come back. The Wall Street party can continue for a while but that is irrelevant. Risk right now is at a maximum and it is critical to protect your wealth. The markets can turn at any time now.

What you can do today to Protect Yourself

Less than 1% of investors hold physical gold. The most important thing financially to do this decade is to survive. Gold has the longest track record of providing financial risk insurance. Gold has historically held its value. Bulls make money, bears make money, but pigs get slaughtered! It feels like we are near a tipping point. It looks like there will be many who will be financially slaughtered. The reason you move some assets into physical gold is so that you won’t be one of those completely slaughtered when the system and the markets collapse. Why take that chance? Bidenomics will not save you. CBDCs will not protect you. Physical gold has always been the financial survival lifeboat.

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