From the gold standard to fiat money - crises were used to change the nature of currency

How money has changed over time 

U.S. currency has changed over the two-plus centuries the country has existed — from a currency issued during the nation's early years backed by the “anticipation of tax revenues,” to one backed by gold to the currency we have today backed by faith in the U.S. government. Our faith in the government is what generally gives the dollars in our pockets value. How much the dollar is worth at a given moment depends upon market forces. And whether the dollar will retain value in the future depends on how other countries view the U.S.

The gold standard

All major industrialized countries were on the gold standard from about 1871 to 1914, with a fixed price for an ounce of gold and a fixed exchange rate that helped stabilize currency values and promoted trade and investment, as explained by The Conversation. The crises of World War I and then the Great Depression moved the industrialized countries using the gold standard to first suspend, and then discontinue it. 

First crisis

In 1914, at the outbreak of World War 1, in need of more cash, some countries suspended the gold standard. Other nations, such as the U.S. and the U.K., still held to it.

Second crisis

In the 1930s, the Great Depression caused some countries to abandon the gold standard as unsustainable. 

In the U.S., in April 1933, then-president Franklin Roosevelt was afraid that citizens' lack of confidence in the economy would cause a run on the banks and declared a bank moratorium, as the website History explains. Banks were not allowed to exchange other currency for gold and people were required by May 1st to turn their gold coins and certificates in denominations over $100 for other money at $20.67 per ounce. 

By May 10th, the government had taken in $300 million of gold coins and $470 million of gold certificates. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed.

Raising price of gold to “make more money”

In 1934, the government increased the price of gold to $35 per ounce “effectively increasing the gold on the Federal Reserve’s balance sheets by 69 percent.  The increase in assets allowed the Federal Reserve to further inflate the money supply.” So, although the U.S. dollar was still backed by gold, citizens could no longer hold it and its value was artificially increased.

The U.S. dollar becomes the world’s reserve currency

IMF and World Bank established

In 1944, delegates from 44 countries convened in Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference. The delegates at Bretton Woods declared the U.S. dollar as the world's reserve currency, with all other currencies pegged to its value, Investopedia recounted. The International Monetary Fund (IMF) and the World Bank were also established during the conference. 

Dollar becomes fiat currency

The Bretton Woods agreement ended in 1971 when then-president Richard Nixon said that the U.S. would no longer exchange currency for gold. By decoupling the dollar from gold, the dollar has no fixed value but depends on the market to give it value. That is called fiat currency and that is the currency we have today. 

Watch Ben Shapiro as he explains in the video below how moving from the gold standard allowed for massive inflation including the inflation experienced today.

Today we are going to explain what the gold standard was, why it mattered and why it has something to do with the massive inflation we are seeing right now, now that no one is on the gold standard.

Gold standard returning?

Doesn't look good for the U.S.

Steven Forbes, chief editor of Forbes, explains in the video below that some countries are forming new financial alliances and moving back to a gold standard amidst doubts about the long-term value of the U.S. dollar and the perceived decline of the U.S.  

Signs of change are here. One is that central banks have been purchasing gold at record levels in recent years. Buyers include China, India, Russia, and a number of other countries, such as Poland. They are reacting to the growing doubts about the long-term value of the dollar, which in turn is a symptom of the perceived decline of the U.S. Another sign is the popularity of cryptocurrencies, originally a high-tech cry for help in the face of increasingly unreliable government fiat currencies.