Money backed by gold refers to a monetary system where a country’s currency or paper money has its value linked to gold. For many years in the late 19th and early 20th century, many major economies had currencies that were fully or partially backed by gold. This was known as the gold standard. In a full gold standard system, the central bank of a country guarantees to exchange the currency for a fixed amount of gold. So, the currency value rises and falls in direct relationship to the price of gold.
A gold standard limits the amount of money that a government can create
Basing money on gold limits how much new money can be created and circulating in the economy. New money can only be minted if additional gold reserves are also acquired. This constrained money supply aims to foster price stability. The gold standard is praised for fostering low inflation and monetary discipline but criticized for preventing governments from effectively responding to financial crises and economic downturns with expansionary monetary policy tools. In summary, money backed by gold is a currency derived from and guaranteed by a country’s gold assets. However, global economies today do not operate on a gold standard.
Mostly all currencies today are not backed by tangible commodities
Most economies today have fiat money systems rather than commodity-backed currencies like the gold standard. Fiat money is a currency that is not backed by or linked to any physical commodity. In a fiat system, money derives its value through government regulation or law. Fiat money does not have intrinsic value or uses as a commodity. It derives value through government decree and public faith in the currency. There are no constraints on the amount of money governments and central banks can create. Its supply is controlled by and tied to economic factors and policy goals.
All major economies use a fiat monetary system today
All major world economies use fiat money today, including the United States, Eurozone countries, Japan, the UK, China, and other major players. Some cited benefits of fiat money include a more flexible and responsive monetary policy, higher liquidity with more available money, and better tools for governments to impact the macroeconomy. Potential downsides of fiat currencies are that they rely heavily on public trust, lack a tangible value backing, and may foster deficit spending and inflation if mismanaged. The classical gold standard is now a relic of history. In this week’s article, we look at how our money was once real and backed by gold and how today it is losing buying power backed by nothing but debt.
Great Britain adopted a gold standard in 1816 and other countries followed
The first major gold-backed monetary system is generally considered to be the gold standard adopted by Great Britain in 1816. Under the British gold standard, the Bank of England guaranteed it would redeem paper pound notes for their value in gold bullion at a fixed rate. This helped inspire confidence in the paper money. Other major economies soon followed suit to back their currencies with gold reserves maintained by their central banks, including Portugal, Australia, and Canada during the 1850s. Germany adopted the gold standard in 1871 alongside monetary unification after the German Reich was established as a united country. Adherence to the gold standard spread as it was seen as providing monetary stability and harmonic trade conditions between nations by reducing currency fluctuations.
The United States officially had a gold standard in 1900
In 1873, the US Government stopped minting silver coins and shifted towards a de facto gold standard. This was codified into law with the Mint Act of 1873. The United States formally adopted a gold standard for its currency in 1900 with the passage of the Gold Standard Act. This codified a commitment to backing the dollar by gold which had existed in practice for a few decades.
The Gold Standard Act of 1900 established gold as the sole standard for redeeming paper money, effectively putting the US on an official gold standard. The legislation required the federal government to redeem all circulating notes and coins in gold on demand. It also limited restrictions on the free coinage of gold. By pegging the dollar to gold, the value of the dollar was stabilized. This increased public confidence in the currency and reduced fluctuations in the exchange. This time in US history backed by a gold standard would last for over 30 years through great economic expansion.
The Federal Reserve Bank was created in 1913 here in the United States
The Federal Reserve Bank was created in 1913 primarily to address weaknesses and financial instability in the US banking system that led to financial crises, bank runs, and panics. It created a centralized, coordinated banking system by consolidating power that had previously been split between various regional and nationally charted banks. The Federal Reserve was designed to serve as a “bankers’ bank” that could provide loans and liquidity to banks during times of crisis and distress. It was intended to provide greater oversight, standards, and coordination of banking to make the system less prone to instability and panic.
With the creation of the Federal Reserve System here in the United States, the Federal Reserve Bank centralized control over monetary policy including interest rates and the money supply instead of putting this solely in the hands of politicians. The Fed was given tools and mandate to serve as a lender of last resort that could provide credit and liquidity during periods of financial panic. The framers of the Federal Reserve intended for it to address weaknesses in the banking system that were seen as root causes of financial crises so the system could be more stable and resilient against future economic shocks and losses of public confidence. In hindsight, this was great news for the Fed and some corrupt bankers and politicians, but it was the start of some very bad news for the eventual loss of buying power that our money was going to experience for the decades that would follow.
FDR ended the gold standard for US citizens in 1933
The strict gold standard would remain intact in the US until 1933 when economic pressures from the Great Depression forced President Franklin D. Roosevelt to declare a temporary bank holiday to stop bank runs and discontinue gold redemption. Private gold ownership was banned and people had to turn in gold for paper currency. This ended the convertibility of dollars to gold that was backing US currency for US citizens. This was to give the government more control over monetary policy. $20.67 per ounce became the standard set government rate paid out to citizens forced to surrender their private stores of gold to the US Government once the dollar was taken off the gold standard in the early days of FDR’s administration. This was considered by many to be payment well below gold’s fair value. In essence, FDR devalued the US dollar because it was backed by 1/20 oz of gold which was adjusted now to 1/35 oz of gold. The US Government instituted by FDR devalued the US dollar to a 40% reserve ratio. 1933 could be looked at as the first US default on its obligations.
International convertibility of dollars into gold was still maintained after 1933 for foreign governments and central banks under the Gold Reserve Act of 1934. Then the Gold Reserve Act of 1934 raised the amount slightly to $35 per ounce. This established a two-tiered system that suspended domestic convertibility of dollars into gold but allowed dollars to be backed by a certain amount of gold internationally. A partial gold standard backing the dollar internationally remained in place for nearly 40 years until 1971.
The Bretton Woods Agreement of 1944 pegs the US dollar to gold
The Bretton Woods Agreement established a system of rules, institutions, and procedures to regulate the international monetary system after World War II. It established the rules for commercial and financial relations among top industrial states. Under the Bretton Woods system, the US dollar was pegged to the price of gold at $35 per ounce. Other countries fixed their exchange rates to the US dollar since it was as good as gold. The US Government guaranteed that foreign central banks would be able to exchange $35 for an ounce of gold. This provided backing for the US dollar as the world’s reserve currency.
Bretton Woods established the US dollar as the world reserve currency
The US was committed to printing dollars to purchase excess gold supplies to prevent gold prices from rising above $35 per ounce. This ensured relative price stability. By pegging the USD to gold at $35, the Bretton Woods system created a stable international monetary framework with reduced currency fluctuations and uncertainty which helped facilitate global trade and economic growth for years. Bretton Woods established both a gold standard for the dollar and a system of fixed exchange rates for that gold-backed currency at $35 per ounce. This peg lasted until 1971.
US strips silver from its coinage in 1965 by President Lyndon Johnson
As silver prices increased in the early 1960s, the intrinsic value of silver coins started exceeding the face value of the coins. This led to widespread hoarding and created coin shortages. The increasing silver prices meant the government had to acquire large amounts of silver at high costs to keep issuing coins with silver content. This was straining government reserves and budgets. With coins being hoarded or pulled from circulation due to their silver, the US Mint had to mass produce many higher denomination coins in base metals to address the shortages. Removing silver from circulating coinage and minting base metal coins preserved the stability and uniformity of US coin distribution and production.
Silver coinage after 1965 has no intrinsic value except as a circulating currency
With silver removed from coins, it eliminated the need for Silver Certificate paper currency that had to be redeemed for silver coins. Silver Certificates stopped being produced. All US coins moved to have a uniform composition from base metals like copper and nickel, unlike earlier coins containing 90% silver. While convenient, base metal coins no longer contained an intrinsic value from precious metals. This meant coins now had almost no value if not used as circulating currency. Uniform base metal coins proved far easier to produce and regulate for the government but unfortunately provided no value to the coins themselves except as a circulating currency.
Bretton Woods Agreement meets its demise in the early 1970s
The Bretton Woods Agreement from 1944 started to fail and would eventually collapse in the early 1970s. The expansion of dollars in circulation to pay for things like the Vietnam War exceeded the amount of gold backing those dollars. This threatened the $35 dollar-gold peg. Growing US trade and current account deficits meant more dollars were held abroad while US gold reserves were depleting. Confidence declined. The supply of printed dollars delinked from real growths in US gold reserves. Surplus dollars abroad were overvalued relative to gold.
Some nations started to exchange too many dollars for US gold reserves
Nations like France and Britain saw declining dollar values versus their currencies and began to cash them in for gold, fearing inflation from Washington overspending. Events like oil embargoes, stagflation, slower growth, and globally rising unemployment in the early 1970s put strains on fixed exchange rate regimes. By 1971, the rising external liabilities forcing dollar devaluations plus inflating US deficits made the existing Bretton Woods dollar-gold peg framework unsustainable. Floating exchange rates had to emerge instead.
President Richard Nixon eliminated the gold standard in 1971
In 1971, the US dollar underwent a significant transformation when President Nixon ended the convertibility of dollars into gold “temporarily.” President Nixon announced the US would suspend converting dollars into gold, effectively ending the Bretton Woods system and gold standard backing of the US dollar. With no dollar-gold peg, global exchange rates began to float freely based on supply and demand rather than fixed rates. With the dollar no longer linked to gold, its value decreased relative to other major currencies as investors lost confidence in the unrestrained US printing press. $1 from 1971 is now worth about $.15. $1 of gold from 1971 is now worth about $70.
The sudden devaluation and lack of gold convertibility weakened global trust in the dollar as the dominant reserve currency held by central banks. Freed from gold discipline and the need to defend the dollar peg, US inflation dramatically escalated later in the 1970s with the excessive printing of dollars. The US closing the gold window set free uncontrolled printing of the dollar, subsequent devaluations, rising inflation, and the beginning of major foreign exchange rate volatility that continued for the rest of the decade.
The petrodollar system created new demand for US dollars
The petrodollar system was an informal arrangement that was reached between the United States and Saudi Arabia in the mid-1970s under President Nixon and Secretary of State Henry Kissinger. The petrodollar system originated from discussions between the US and Saudi Arabia about pricing oil sales in dollars in return for security guarantees and military aid. This created a demand for the dollar as oil-importing nations needed dollars to pay for oil. By 1974, an agreement was reached that Saudi Arabia would price its oil in dollars in return for US military and security assurances. Saudi Arabia’s clout as the biggest producer of OPEC helped establish dollar pricing. The petrodollar system emerged from agreements made between the US and Saudi Arabia before President Ford came into office. It helped cement dollar demand after Bretton Woods collapsed.
US debt has expanded exponentially since the gold standard ended in 1971
US debt has expanded tremendously since 1971 when President Nixon took the dollar off the gold standard. The gold standard provided some fiscal discipline for the government to maintain a balance between debt levels and gold reserves backing the dollar. With no gold backing, this discipline disappeared.
1971 opened the door for Washington’s unrestrained deficit spending
Expenses related to the Cold War, multiple wars, and broader US global military commitments have contributed enormously to national debts. Massive tax cuts combined with increased federal spending on domestic programs like Medicare have also subtracted from government revenues while boosting its outlays. Government rescues of financial system after crashes along with recession-fighting stimulus packages have since ballooned deficits. The rise in entitlement programs, social security costs, and healthcare obligations as the population ages has driven spending higher without the income to offset it. In essence, leaving the gold standard opened the door for Washington’s unrestrained deficit spending which has been exploited by most administrations and congresses ever since, irrespective of party, driving the exponential growth of US national indebtedness.
Fiat money expansion by the Fed inflates markets then eventually crashes them
The Federal Reserve played a key role in the build-up to the stock market bubble that led to the crash of 1987. The Fed aggressively cut interest rates from 1980–1984, which significantly lowered borrowing costs for businesses and ultimately helped fuel economic growth and elevate stock valuations. Critics argued loose monetary policy and expansion of bank credit by the Fed fostered increased speculation in stock markets and encouraged the influx of investor money into stocks. The Fed’s initial expansionary monetary policies, encouragement of credit flows to stocks, regulatory gaps, and delay in restraining credit have been cited as key ways it potentially contributed to the severity of the late 1980s bubble.
Many bubbles have been “manufactured” and burst since 1998
The Long Term Capital situation imploded in 1997. The Dotcom Bubble burst in 2000. The Subprime Mortgage Crisis exploded in 2008. It would be an overstatement to suggest the Federal Reserve “manufactured” those three economic events. However, there are reasonable arguments that certain aspects of Fed policies may have significantly contributed to or exacerbated factors that enabled the formation of those financial bubbles and their subsequent crises. In today’s market, it is as big of a problem as ever.
As for Long Term Capital Management in the late 1990s, while lightning-rod external events like Russia’s default were the direct catalyst, the Fed may shoulder some indirect blame for fostering an environment of derivatives risk-taking absent tighter checks. In the cases of the dotcom bubble and subprime mortgage crisis specifically, the extended period of low interest rates during the 1990s and up to the mid-2000s enabled increased investment speculation, risk-taking behavior, and abundant flows of easy money—indirectly incentivizing the extremes that built up and eventually collapsed in those markets. All the while our currency loses value, and the financial system becomes weaker and more reliant on fake money created and lent out by the Fed. Increased leverage and financial derivatives would not be possible to this degree if we were still on a gold standard.
The War on Terror starting in 2002 cost trillions of dollars of printed money
Estimates on the total cost of the US War on Terror starting after the September 11, 2001 attacks and launched in response under President George W. Bush vary quite widely but tend to range between a few trillion to over 8 trillion dollars. In 2002 George W. Bush told the American people that it would cost approximately $75 billion. Our government and the Fed have made a total mockery of our financial system, debt, and the value of our dollar. 2002 could be seen as the true start of exponential money expansion and printing to an absurd degree. A dollar from 1999 is now worth $.55.
Quantitative Easing Programs starting in 2008 have mouse-clicked trillions of dollars
The Federal Reserve initiated several rounds of quantitative easing (QE) programs in response to the 2008 financial crisis and Great Recession. In November 2008, the Fed launched QE1 involving purchases of $600 billion of mortgage-backed securities and debt. This helped relieve pressure on distressed housing-related assets. In November 2010, with the economic recovery looking weak, the Fed announced QE2 which involved $600 billion of US Treasury security purchases through mid-2011. In 2011, with interest rates still near zero, the Fed launched Operation Twist—a stimulus effort involving the purchase of long-term securities financed by selling short-term securities.
By September 2012, with continuing high unemployment, the Fed started an open-ended QE3 program involving $40 billion a month to buy agency mortgage-backed securities. This was expanded over time. In December 2013, with modest economic gains, the Fed began tapering or reducing its QE securities purchases over the coming year.
In total, four major QE programs were conducted from 2008–2014 in successive rounds as the central bank sought to prop up liquidity, hold down interest rates, and stimulate the economy through unconventional monetary expansion during challenging post-crisis periods. If you print all of this money out of thin air what do you think is going to happen to the buying power of your currency? Ben Bernanke, the Fed Chair at the time, ended up winning a Nobel Prize in 2022 for his quick money printing scheme to handle the subprime mortgage crisis. Way to go Chairman Ben.
Covid in 2020 was a convenient excuse to create trillions more
Liquidity problems in the overnight markets started in September of 2019. Along came a convenient pandemic to roll out, which proved to be a great excuse to print trillions of more dollars. This is in addition to the national federal debt increasing from $5 trillion in 2002. As you can see the big increase in national debt continues at $34 trillion in 2024 and counting. What a brilliant plan our central bankers and politicians have. Just mouse-click more money and spend into oblivion until the system collapses or our currency is almost worthless. Trump’s CARES Act, the follow-up Covid Relief Act, and Biden’s American Rescue Act added $6.5 trillion in new spending and $14 trillion to the nation’s debt during their 8 years in office. Our system is addicted to debt and our currency is getting riskier and losing significant buying power. This whole process is now accelerating as the numbers get more astronomical.
Banks are supported by more fake money and more lending programs
The US saw some of its largest bank failures in history in 2023. There were 10,000 banks in 2008, now there are 4,600. Earlier in 2023 Moody’s cut its outlook for the entire US banking sector to negative and put six banks on downgrade watch. Banks today are sitting on over $685 billion in unrealized losses on their investments. Bank of America reported unrealized losses of $131.6 billion on securities in the third quarter of 2023. The FDIC insurance is not anywhere near enough coverage for all deposits. The 4 biggest banks BOA, Chase, Citibank, and Wells Fargo control 4 trillion of uninsured deposits. There is $7 trillion in banks that is uninsured. A country with a weak and over-leveraged banking sector historically is not known for a strong currency that you can trust. The trust and the value of our currency are dwindling.
Total global debt hit $310 trillion at the end of 2023, according to the Institute of International Finance. In the US, total debt (household, corporate, government) is $97 trillion. The Federal Government alone has $34 trillion in debt—$1 trillion in the last three months, $2 trillion in the last six months, $4 trillion in the last two years, and $11 trillion in the past four years. Hundreds of thousands of people from all over the world—we don’t know where—have poured across our border in the last six months. Our spending and deficits are at historic highs and growing.
The trend is clear. Our great country once had a gold standard and money that could be trusted to hold its buying power. The origination of the Federal Reserve Bank in 1913, FDR in 1933 devaluing the dollar, taking silver out of all coinage in 1965, the beginning of total fiat money in 1971, the absurd quantitative easing programs of the Fed in the 2000s, the trillions of dollars of debt and interest, the unlimited spending and government deficits has created a monetary system so weak and a currency that is losing tremendous buying power that even other countries are purposely doing business in their local currencies to avoid ours. The mighty dollar is losing its grip on world reserve currency status slowly over time. Our dollar has lost significant buying power over time, especially in the last three years.
Our fiat money is not money because it is not a store of value. It is simply for transactional and currency circulation purposes. Our fiat dollar loses purchasing power over time. In review $1 in 1913 is now worth about $.04. $1 from 1971 is worth approximately $.15. $1 from 1999 is worth $.55. $1 from even three years ago is worth $.80. Gold on the other hand has a long track record of being exactly the opposite. Gold is a store of value. Gold holds and builds buying power over time. Gold allows some financial freedom and protects your sovereignty. Gold will allow you to not be financially ruined when our present fiat currency is devalued and possibly collapses. Make sure you have enough gold to secure a lifetime of savings.
|gold standard established in Great Britain
|US went on gold standard officially
|Stock Market Crash and Depression
|FDR – 1/20 oz of gold to 1/35 oz of gold – dollar devalued (40% reserve ratio)
|Bretton Woods Gold pegged at $35 oz – world currencies backed by US dollar which was backed by gold
|Lyndon Johnson striped silver from coins
|US had no gold left to pay other countries as Bretton Woods implodes – gold standard eliminated by Nixon
|Ford allowed US citizens to own gold again
|US federal debt was $800 billion when Reagan took office
|Stock Market Crash
|Long-Term Capital Shockwaves
|The Dotcom Crash
|The War on Terror
|Quantitative Easing/Helicopter Money – QE1, QE2, QE3, Operation Twist
|Covid excuse to print trillions
Trump’s CARES Act, the follow-up Covid Relief Act, and Biden’s American Rescue Act, the Republic/Democratic duo added $6.5 trillion in new spending and $14 trillion to the nation’s debt during their 8 years in office
|Record budget deficits and spending – The Bank Term Funding Program (BTFP) – Reverse Repo
$50 trillion in debt by 2030 and possibly $3 trillion a year in interest expense