What would happen if the world went back to the gold standard and actually backed their currencies with something of value? First, let’s examine how the gold standard came to be and how it came to be overthrown. Then we’ll discuss the why and how of a new gold standard.
How did the Gold Standard Work?
For centuries, gold was the closet thing to a global standard for money. Gold coins first appeared in China and were soon produced in Greece and Persia. However, gold is physically very heavy. When you need to transport large amounts of money, the corresponding amount of gold can be quite difficult to move around.
Eventually, banks began printing vouchers that a depositor could use to redeem their gold at any time. As time went on, these notes became transferable, allowing anyone who possessed the note to redeem the equivalent amount of gold. This evolved into paper money.
When governments began printing paper money, they set the amount of gold that could be redeemed for each banknote. This meant that while the banknote itself was intrinsically worthless, it could be redeemed for something valuable. The gold standard was first adopted by England in 1821. The gold standard reached Germany in 1871 and by that time had become commonplace throughout the world.
The Collapse of the Gold Standard
If you like this article, read and find out how Bitcoin protects you from Inflation: Is Bitcoin A Safe Haven in Times of Crisis? By Aaron Koenig.
The gold standard began to show signs of weakness with the advent of World War I. Governments began facing large debts to fund the war. With the supply of gold being limited by its output, which could incidentally be disrupted by the war, the supply of money that governments used to pay their debts was likewise limited.
As the supply of gold began to falter, smaller countries began using the British pound and the U.S. dollar as reserve currencies. Other countries began to reduce the amount of gold that could be redeemed for their currencies, allowing them to print more money. This led to massive hyperinflation in Germany. Many countries increased interest rates in an attempt to get people to keep their deposits in the bank as opposed to converting them to gold. This harmed the global economy further. The British suspended the gold standard in 1931.
The U.S. lowered the amount of gold that could be redeemed with a dollar to stimulate its economy in 1934. This caused more holders of gold to convert their gold into U.S. dollars. This effectively made the U.S. dollar the global reserve currency. By the end of World War II, the United States dollar was the only national currency still backed by gold.
By the late 1960s, the trade deficit of the U.S. with other countries was beginning to grind down the dollar’s ability to keep up with other currencies. Other countries began cashing their dollars in for gold as they began to fear that the U.S. would eventually run out of gold.
The Netherlands and Belgium were able to redeem their dollars for gold, with Germany and France announcing they would do the same. The U.S. had continued to reduce the amount of gold that could be redeemed for the dollar. When Britain requested to cash their dollars in for gold in August 1971, U.S. President Richard Nixon was forced to end the gold standard completely. Ever since that time, the world’s currencies have floated in value against each other. Their supply is now limited only by the whims of the central banks who control them.
Why We Need a Real Gold Standard?
Having gold or any commodity backing a currency means that the supply of that currency is limited by the supply of that commodity. Well, that is true in theory. But as we have seen in the history described above, the gold standard can be manipulated. All it takes is to change the amount of that commodity that can be redeemed for each unit of currency.
What is the benefit of limiting the supply of currency? The supply of a currency affects the value of that currency. The more currency you print, the less valuable it becomes unless the growth of the economy happens to match the increase in the money supply. Central banks do not print money in times of growth. They print money in times of slow growth or recession to get economies moving again.
When the value of a currency is reduced by central bank activity, it means that everyone who holds that currency suffers a loss in value. Central bankers think this is a good thing as it spurs people to continue contributing to the economy. But to someone looking to maintain the value of their wealth, it makes fiat currency a poor currency to store value.
Gold has its weaknesses as a store of value. Its supply and demand depend on many factors, including the economy, the capital required to explore and carry out the excavation, and the labor that is required to do the hard work of mining the ore. Bitcoin, with its regular supply schedule, would be a much better “gold” upon which to establish a standard. It is designed to be resistant to centralization, making it also resistant to the manipulation that fiat currency was designed to allow.
With Bitcoin or any number of cryptocurrencies as currency, people can keep their value stored in Bitcoin and be able to spend it freely without worrying that it will be subject to the whims of central bankers. With the Census Note, someone can carry around their cryptocurrency wallet with all the convenience of a payment card and be able to access it on their phones to make payments or receive money.
Gold has been valued by humans for over 5,000 years. It served as the backing commodity for paper money for a few hundred years, but national debts and trade deficits led the world to abandon it for the current system of fiat currency. Now, instead of being limited by the supply of gold, the supply of fiat currencies is limited only by the imaginations of those central bankers who can justify new reasons to print money. The world needs a currency that can be a reliable store of value that is not subject to the manipulation of any central authority.