The Gold Standard Myth
We all heard about the Gold Standard that the United States Dollar operated under. It was a time that the USD was backed by gold. This, to many, gave it validity. These same people view Nixon's removal of the gold standard as catastrophe that is dooming us all.
The reality of the situation is that it is all a myth. The Gold Standard did not truly exist.
Like most things, many espouse ideas that are not accurate.
Source
Sound Money
The belief in sound money is that it cannot be arbitrarily expanded. Many people feel that removing the Gold Standard set the world for dealing for a Fed that prints money as it sees fit. Of course, anyone who knows how it works understands the Fed does not create USD. A quick read of the Federal Reserve Act shows how the Fed does not create legal tender. Hence, it is not in the money game.
One of the biggest flaws in sound money is that it is impossible to achieve money equilibrium. Free markets mandate that supply has to meet demand. This is what the Fed wants people to believe it does. The reality is that it is not within its power. It is the commercial banking system that generates the USD.
What is overlooked in the Gold Standard Myth is the fact that banks were creating convertible notes throughout this period of history. So, while the Gold Standard was in effect, the commercial banking system was providing monetary elasticity to the system. If not, economic expansion could not take place, especially to the degree that occurred coming out of the Great Depression.
Few take the time to ask where all the money came from to provide for that growth? If they did, they would quickly realize that monetary expansion was taking place.
The Eurodollar System
This is the second piece of the puzzle that few actually understand. It is also what made the Gold Standard really a moot point.
Internationally, the USD in foreign banks was used to generate more money. This started in the late 1940s/early 1950s. Thus, by the early 1970s, the Fed has no idea what money even was. The international banking system was creating money as it saw fit and not even telling the Fed. Hence, they (the Fed) had no idea what was even taking place. The Eurodollar system operates outside the control of any central bank or government.
Therefore, when Nixon removed the United States from the Gold Standard, he was just killing a dead animal. The global reserve currency was not the USD but the Eurodollar. This does not mean the USD in foreign banks per se but, rather, the entire monetary system that was built upon it.
This also conveniently solved Triffin's Dilemma for the Fed, something it and the US Congress managed to botch up in ensuing decades. It is also what is putting us in the situation we now find ourselves in.
Monetary Elasticity
Few consider monetary elasticity to be something important yet it is the foundation of a free market system. There is little debate that markets expand and contract. The same is true for economies.
At times, the demand for money increases. When this happens, it is imperative that the money supply expand to match. The idea of fixed money cannot meet this criteria, especially when it is a reserve currency. One of the pillars of a global reserve currency is flexibility (this is why Bitcoin will never serve in this role).
Of course, there was a more practical matter with the Gold Standard for the US Government. All the USD could be redeemed for gold, at $35 an ounce. The problem is the US was having all its gold sucked from its hands. Fortunately for it, they were able to steal (confiscate) is back from other countries over the ensuing decades.
While the Gold Standard is a romantic time period for some, it actually never existed. Domestically the commercial banking system was creating convertible notes to when the demand for more money hit. This was compounded by the explosion of the Eurodollar system internationally that went parabolic for 50 years. Global trade fed into this system as the US increased it imports, thereby flooding the international system with USD.
Unfortunately for the world, contraction began as the US began to run up huge deficits. This brought a lot of USD back into the domestic banking system, a problem compounded post-GFC by the Fed's QE programs, locking USD into the banking and financial sectors. This served to starve the global economy of the USD, contracting the Eurodollar system.
This is one of the reasons why our global growth rates are far behind the period preceding this. By some estimates, we are down $40T-$50T in global GDP compared to where is should be. That is a lot of loss wealth over the past 15 years.
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I've heard the line that our debt was loosely tied to GDP prior to the Political Covid Response.
It almost all just feels made up now, which I do know isn't accurate either.
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BEER.The Coinage Act of 1792 set the US dollar as a particular weight in silver.
People in the US were using worn out Spanish Dollars; so they took a stack of coins from circulation and set the dollar equal that amount of silver.
The founders thought that the ratio of the price of gold to silver was a given; so they created a gold coin based on this ratio.
The system didn't work. Every time there was a gold or silver discovery, there would be a financial crisis. It was also absurd to leave one's economy hostage to the ups and downs of the mining sector.
The idea that the US dollar was equal to the price of a given weight in silver held for a few hundred years. The gold standard is not a total myth.
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Certainly it is. There were Demand Notes printed during the Civil War. In fact, didnt Southern States create their onw currency? That was not backed by gold. Yet it encompassed a significate portion of the US GDP.
Ironic how it is easy to overlook and focus only on the USD when there were dozens of different currencies created during the time period you mention.
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I agree that there was never a time when there was a perfect economy based on gold or silver.
I will have to check my history books, but I think the Civil War came after 1792.
The best way to point out that the US never had true and perfect gold standard is to point out that the US started with a huge unfunded war debt. Many of the founders opposed central banks, however, Hamilton led the creation of a central bank that engaged in practices similar to other central banks.
The Coinage Act of 1792 did, in fact, set the value to a weight in silver and people used this as the basis for their financial calculations. They didn't mint enough coins and people still used Spanish dollars.
The International community tended to use weights in gold as the standard unit of exchange. The "gold standard" really only applied to international trade.
The US attempted to peg gold to a given amount of silver creating a bimetallic standard. This kept leading to problems and the prices of silver and gold fluctuated with discoveries of deposits of silver and gold.
The silver coins on the market tended to be shaved. People preferred using silver certificates to heavy silver coins.
Despite those problems the US currency was pegged to a precious metal for a long. International businesses tended to use weights in gold for their finances.
When conservatives reminisce about the gold standard, they are thinking of a day when people used silver coins.
Attempts to peg currencies to the price of a precious metal has the same problem as attempts to peg currencies to each other.
I think the biggest argument against the gold standard is simply that people have different definitions of what the term "gold standard" means. What most people mean is that the dollar was pegged to a weight in silver for a long time.
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Interesting ideas. I'm not sure I agree. For example if an economy is expanding that uses gold, not currency, then it will experience deflation. I'm not sure why that is a bad thing. The idea of my money getting MORE valuable appeals to me.
What makes you think deflation is a good thing? People presume that it is. What happens during deflationary periods? People lose jobs. Is that a good thing? Economic contraction takes place. Not a good thing.
Was the Great Depression a good period? No doubt that was deflationary. How about the last 25 years in Japan?
How would you like to see the value of all your assets decreasing. Would that make you happy?
I dont get how people feel wide spread deflation is of benefit. When you follow it all the way through, a lack of investing due to no returns means society will stall.
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I think we may be talking about two different things. I'm referring to price inflation ( a bad thing), which may lead to hyper inflation ( a really bad thing). Monetary inflation has occurred since the Federal reserve was established. A dollar then is worth a penny now. People loose jobs and the economy goes to hell during extended monetary inflation. Remember Jimmy Carter?
There are a LOT of lies about the Great Depression. History is typically a lie so I don't believe much of what I hear about the Great Depression
Why would an economy contract during a period of monetary deflation? If my dollar is worth more today than it was yesterday couldn't I buy more stuff with it? Wouldn't that cause demand to increase? Wouldn't that be an an economic expansion? Wouldn't more people gain jobs?
Nothing has value till point of transaction. You could essentially now say that crypto itself like bitcoin now gives the USD some of it's value. It all comes down to what people are will to trade in exchange for something else that gives it it's true value.
Fully have to say though that spending and the debt in the US is nuts and instead of imposing more taxes they need to seriously retract and re-evaluate where money is being wasted because there's A LOT of it. They treat it as a endless atm machine that needs to stop.
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Nice reply, I liked the ATM example
That is an enormous amount of wealth, but I can't say I'm shocked that the government managed to get us behind.
from the various texts I have read it seems that there has never been as much gold as dollars in correspondence. So I understand that Nixon has only made legal what was already reality. Euros or dollars are coins that can be printed at any time and only a few decide this.
Both are only created when a loan is taken out. They are both under fractional reserve lending. Hence, it is the commercial banks that create Euros and Dollars.
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thanks for this clarification ... I always learn new things by following your profile
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Well. . . my mind is officially blown.
I understood the need for monetary expansion, and abundant cash. I thought initially for cryptocurrency to replace countries currency, a stable coin like USDT had the large amount of tokens to satisfy the need for large amounts of currency, but it is very centralized and would potentially be like Facebook Bucks like Libra and Diem. So I hoped USDC or Dai, but they are on the Ethereum blockchain with high transaction fees, and smaller supply then USDT, so then I thought maybe Bitcoin denominated in Satoshis and widespread use of the lightening network?
Do you think their are any stable coins which are good candidates for replacing national currency?
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Depends upon the nation and the currency. There are a lot out there that are nothing to begin with.
Most crypto is looked at like stock as opposed to currency. Hence we are looking at a stablecoin of some sort. The challenge is the USD backed ones are in the same situation, a shortage of USD if they are truly backed (which I doubt). If not, then they will increase the money supply.
Something like HBD has potential since it is something that can expand and contract due to its tie to $HIVE. It is also out of the reach of central banks and governments so the concept could expand like the Eurodollar system.
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So what is your view of where the Eurodollar will go? I have a feeling that it is going to go down because of the way they took rates negative and there is only going to be more debt created by the US. So there just won't be enough dollars.
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The more debt by the US does help the collateral side of things but you are right I believe: the USG will keep sucking more USD out of the Eurodollar system, forcing contraction. This will cause foreign entities to keep having to sell their US bond holdings to raise USD.
This will keep us on course for economic slowdowns until crypto can fill in the void.
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Well put.
Bitcoin maximalism is nonsense. A money supply that inflexible would kill growth. Or holders of BTC would become parasites sucking value out of the real economy at a rate the current financial sector pales in comparison to.
It is not a coincidence that Saifedean Ammous who is the best-known proponent of the Bitcoin standard is an Arab. Arab countries have a long history of government mismanagement and very little trust in authorities. That's why Arabs tend to be huge gold bugs.
I dont think this is exclusive to Arabs.
The European nations do not have a history of fiscal excellence either.
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Of course, it's not unique. But there is a reason why gold is so popular in Arab countries in particular. That region's history has been characterized by weak central governments. Partly it has to do with the colonial history and the general tendency of Arabs to disagree a lot amongst themselves.
Even today, Syria and Yemen are in a state of civil war, Iraq became very unstable once Saddam was removed from power, the Gulf states are dictatorships ruled by minority sects. Saudi-Arabia is also a dictatorship with potential for disruption by a Shiite minority.
Elasticity is one feature money should have because demand for money will only keep increasing. It becomes a problem when supply is fixed.
Another lesson taken.
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I don't know that USD has been backed by gold since. That's for the information.
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that is the loss in the last 15 years, impressive, I think it will be possible to recover quickly and we will have to wait a long time to see a recovery