The Death of the Gold Standard – What Happened in 1971 (Part 1)

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

Investopedia, What is the Gold Standard?

Throughout a major part of human history, gold was the only globally recognized unit of account.

And it still has that status, as every system/country/empire agrees on its value. However, today we also use other things as currency.

In this post, I’ll focus on the more recent history of gold as a reserve currency.

Table of Contents

The Gold Standard

We will start with the Gold Standard Act of 1900, which made the US dollars exchangeable to gold.

People wouldn’t have to keep their wealth in gold, but could have it conveniently stored in a bank. For this, they’d receive banknotes, which they can conveniently use in daily life.

If at any moment a person wants his gold, he can enter a bank, give USD and get his gold back.

The gold was pegged at 20$ per ounce.

This was possible because the amount of paper money reflected the amount of gold in reserves.

The Centralization of Power

Unfortunately, history continuously teaches us that we can’t trust a government to keep promises and provide personal freedom in tough times.

Namely:

1933: Confiscation of the Citizens’ Gold

The United States got into a gold deficit during the Great Depression. So the government decided that “hoarding of gold” is worsening the crisis.

And just like that, the government seized all the citizens’ gold.

This literally happened in the land of the free.

With the Executive Order 6102, since 1933, officially, you weren’t allowed to have gold. Your leader needed it. This forced all Americans to exchange their gold for dollars.

The price per ounce increased from 20$ to 35$. Favorable to deposit, unfavorable (and illegal) to withdraw.

This started the centralization of the gold standard in recent history.

Fort Knox, Kentucky – the vault holding the majority of USA’s gold reserves

1944: Confiscation of the World’s Gold

After the two world wars, most of the “west” was in total economic ruin.

To support international economic growth and foreign exchange stability, the world needed a global and reliable monetary management system.

This lead to the negotiation of the Bretton Woods Agreement in 1944, by delegates from 44 countries. It was agreed that the USD will be pegged to gold at a rate of 35$/oz, and all other currencies will be pegged to the US dollar.

I won’t go in the details here, but you can read about the World Bank and the International Monetary Fund – two institutions that were created to facilitate this process.

With over 75% of the world’s gold reserves, the United States took this opportunity to further position itself as the superpower.

Think about it…

Only the US could issue units of account and everyone else pegged to it.

The Abuse of the Reserve Currency

Imagine having the ability to create money.

Well, now that your currency is the global standard, in a way, you can…

The ease with which paper money can be created, by both legitimate authorities and counterfeiters, has led both to a temptation in times of crisis such as war or revolution to produce paper money which was not supported by precious metal or other goods, thus leading to Hyperinflation and a loss of faith in the value of paper money.

Wikipedia, Banknote – History of counterfeiting and security measures

As any time in history, eventually taxes weren’t enough to fund the government spending.

Domestic programs aside, the Vietnam war itself costed the US more than $1 trillion in today’s money.¹

Irresponsible spending is always followed by reckless creation of currency. The US again decided that the price of gold is now 42$/oz, making all currency in circulation worth less.

Other countries took note and didn’t want to be the last holding a bag of worthless USD.

So they started to demand their gold back. Germany, Switzerland, and France were the first to do this.