So why did the dollar stop being backed by gold? From 1879 to 1933, the US dollar was backed by gold—in other words, you could exchange paper dollars for gold coins of equal value, and the US government guaranteed that you could do so. But in 1933, the US government took this practice off the books, and since then, the dollar has been floating freely in terms of its value in relation to precious metals like gold and silver. Let’s take a look at why the US stopped backing its currency with gold and what that means for you today.
What is Gold?
The Federal Reserve System is America’s central bank. One of its primary functions is to maintain stable prices and moderate interest rates. It does so in a variety of ways, but one of them is as a storehouse of value—in other words, owning gold gives people confidence that they can quickly sell something they own when they need to buy something else.
Without being backed by gold, there was more risk that Americans would lose faith in their currency—thereby devaluing it and making it worth less over time. With gold backing, though, people know that what they have now will be useful later; hence why you can always trade cash for gold at a certain rate today. This formula has worked for thousands of years and continues to work today: gold isn’t just good for saving money, it also helps create money in an economy by maintaining trust in dollars.
It’s Not About Gold: That said, not everyone thinks returning to gold backing is such a great idea. Some say that being backed by gold restricts what can be done with money, since only certain things can be purchased and there are caps on how much money you can create—if any at all. When you have an economy that’s growing more quickly than inflation (which is common), having some elasticity in your currency—being able to print more as necessary—is important for growth; otherwise you get deflationary spirals that make it harder for people to do business over time.
What is the Gold Standard?
The gold standard is a monetary system where a country’s currency or paper money has its value directly linked to gold. It means that there is a fixed quantity of gold that backs every unit of currency, usually represented in dollars. The purpose of using gold to back your currency is to prevent over-inflation and devaluation since it’s an inflationary metal – meaning its value tends to rise with time. In other words, if you have one ounce of gold worth $500 today, and inflation increases its value to $600 next year, then all things being equal your money will be worth less than next year. In simple terms: you have $500 worth of stuff today but only $400 worth of stuff tomorrow because there’s more overall currency floating around causing prices to go up.
What is inflation – Inflation is a sustained rise in consumer prices caused when too much money chases too few goods. It can also be defined as a decrease in purchasing power, which manifests itself in rising prices for goods and services.
The opposite of inflation is deflation, where consumer prices are decreasing, thus creating an inverse relationship between inflation and deflation; that is, low levels of inflation generally lead to lower levels of deflation and vice versa. For example, let’s say you buy a new TV for $500 at Best Buy today. Inflation increases as time goes on and next year it costs $600 at Best Buy. You have $100 less purchasing power in your pocket because you can only buy less with your money than last year ($600 vs $700). Inflation has eroded away some of your hard-earned cash in exchange for goods and services over time.
What is deflation – Deflation is a decrease in prices of goods and services. In other words, when your dollars are buying more goods and services today than they were yesterday or last year. Most people find deflation to be a good thing because it means that you’re getting more for your money today than you were before.
Is Gold a Commodity?
If so, why is it used as a currency? : Gold has a number of characteristics that make it a great investment commodity. It’s rare, durable, and indestructible. However, many would argue that gold isn’t really a commodity because its primary purpose isn’t for industrial or commercial use—rather, gold has been used for millennia as a store of value. When you understand how gold came to be associated with money, you can better grasp why people often consider it both a commodity and a currency. The United States formally adopted gold as legal tender in 1879 when Congress passed legislation.
While most investors are familiar with gold’s role as a currency, there are many who assume that it’s a commodity. But what is a commodity, exactly? A commodity is an essential good used for commercial or industrial purposes. There are several reasons why gold was associated with money in ancient civilizations. First, it had intrinsic value; second, it was scarce and difficult to find; and third, its properties were largely unchanging.
Each of these factors made gold an ideal form of currency, and though it isn’t used as such today, its long history with money is one reason why people often consider it both a commodity and a currency. While some investors may use gold to protect their wealth from inflation, its primary purpose is still industrial: gold is used in jewelry and electronics manufacturing. However, what makes gold a unique commodity—and different from other commodities—is that it’s also traded on global markets, meaning that you can buy and sell gold at any time.
If you want to invest in gold but don’t want to buy physical bars or coins, you have many options; you can purchase stocks or exchange-traded funds (ETFs) instead.
History of The Gold Standard in the USA
Why did the Dollar Stop Being Backed by Gold?
From 1879 to 1933, United States paper currency was backed (or defined in terms of) a certain amount of gold. The U.S. adopted a gold standard as its official monetary policy in 1879, but abandoned it for fiat currency under President Nixon on August 15, 1971 when Executive Order 11615 was signed, following similar actions by Germany and France and making sure that foreign governments could no longer demand dollars for gold; effectively ending all convertibility into or out of United States dollars.
In 1975, President Ford ended Bretton Woods and allowed other currencies to float against the dollar thereby changing gold backing into currency backing. This ended any direct connection between gold and major world currencies aside from being non-convertible currencies that are freely traded on global markets at fluctuating exchange rates vis-à-vis one another.
In 1976, President Ford signed Public Law 94-564 which officially ended any further redemption of United States Notes (which were convertible to gold during their issuance between 1862 and 1934) for anything other than themselves. These gold certificates as they were also known, had been issued in denominations of $10, $20, $50, and $100 and represented a claim on gold held by the U.S.
By 1975, almost 80% of all commercial trade between nations was conducted in U.S. dollars and about 67% of all reserves were held in dollar-denominated assets. Only about 6% was denominated in gold, with most of that being held by European central banks as a hedge against inflation and speculation against their own currencies. In April and May 1971, foreign governments began to demand gold bullion from the United States Treasury Department. In July 1971, French President Pompidou demanded 144 tonnes of gold; de Gaulle stated he would exchange its U.S. dollar reserves for gold at $35 per ounce.
Nixon had no choice but to agree and ordered more than 15 percent of all U.S. gold to be sold abroad over the next two years. This resulted in a dramatic fall in prices across the world, including oil prices which declined by nearly 50%. As Bretton Woods continued to unravel during late 1972, foreign holdings of U.S. dollars increased rapidly from $25 billion at the end of August to $36 billion by October and reached $60 billion by December; with France holding almost 25% of that total.
On 12 January 1973, West Germany’s central bank announced it was exchanging dollar reserves for gold at market prices; some observers feared other central banks would follow suit and de-link from dollars thereby ending US control over its own currency as well as reserve currency status. In February 1973, Switzerland agreed to sell $750 million worth of gold to the IMF in exchange for a stabilization credit of $250 million. By March 20, both Italy and Belgium had also switched their U.S.
The Rise and Fall of The Gold Standard
When money is backed by gold, it can be exchanged for that precious metal. However, what happens when all money becomes paper and no longer exchangeable for gold? This is exactly what happened to America following World War II. Learn about how history changed forever with The Rise and Fall of The Gold Standard!
The Great Depression was over, but Americans were still feeling its effects ten years later. Politicians from both sides of the aisle were looking for a solution to help jumpstart our economy and bring in some much-needed revenue. Congress made several attempts at fixing our economic woes before passing two separate acts in 1933: one to reinstate a gold standard and another to address tax rates on corporate income. These two acts led us down a path toward dramatic changes in American society, which still have repercussions today.
The Gold Reserve Act authorized President Roosevelt to remove gold from circulation and forbade its trade or use as a backing for currency. The impact was immediate. The price of gold skyrocketed, rising from $20 per ounce at its low during The Great Depression to almost $35 per ounce in 1940. American citizens were told that all gold would be confiscated and melted down into bars, and their value replaced with paper currency backed only by the Treasury’s promise to redeem dollars for gold at that price. This left people wondering why they should trust government-issued money when it didn’t have any intrinsic value. Why should people hold on to these new bills when they could just get gold instead?
What Happened to All the Gold?!
In 1973, U.S. President Richard Nixon took us off of a gold standard, meaning that our currency wasn’t backed by gold any longer. Since then, a curious thing has happened: The amount of gold in Fort Knox hasn’t really changed! This has led some economists to ask: What happened to all that gold? Where did it go?! It turns out there are two main explanations for what happened to gold after 1971. Let’s take a look at each one below.
The first explanation for what happened to gold after 1971 is that it’s still there. This theory suggests that none of Fort Knox’s gold has left, even though we aren’t on a gold standard anymore. If you wanted to verify that for yourself, there are regular tours of Fort Knox so you can see for yourself! However, if you want to believe that all our gold is still in Fort Knox and just not being used as currency, you may be disappointed. Countries like China don’t trust that we actually have enough gold left to back up its value. As a result, they wouldn’t use American dollars or invest in U.S.-based assets due to their fear of devaluation; instead, they would use another currency backed by gold.
The gold standard, meaning that a currency’s value is determined in terms of a specific quantity of gold and that paper notes are convertible into pre-set, fixed quantities of gold, was widely adopted around 1875. But it lasted only another 50 years or so before being phased out worldwide in favor of fiat currencies not backed by any tangible asset. So what happened to the gold standard in the USA?
Why did President Nixon decide to sever ties with gold back in 1971? Let’s look at some potential reasons…
Ultimately, Nixon made his decision based on some key issues which he outlined in a speech to Congress. A look at these issues makes it clear why so many countries have also now abandoned gold and dollar convertibility. The first issue was that of foreign ownership of US gold reserves . At that time there were 20 European nations with a total of around 10,000 tonnes (1.0Mlb) in official gold holdings – but they had loans worth $30Bn in dollars out to America! At current gold prices that would mean they’d want their $30Bn back – meaning we only actually had about $10Bn worth of real money sitting around in Fort Knox!
Nixon’s second issue was that of economic growth . He noted that having a currency tied to gold meant that in times of recession people and companies would choose to hold on to their cash rather than spend it – as cash couldn’t keep up with inflation. He also pointed out that in time of war, (which America was facing at that time with Vietnam) a gold standard stops governments from using fiscal policy (i.e. running deficits) which can help stimulate the economy during periods of high unemployment and business failures.
His third reason related to exchange rates : he stated that allowing each country to have its own currencies free-floating against each other was critical for international trade; if there were fixed rates between countries then one country would be likely to have an over-valued or under-valued currency compared with another country resulting in export/import trade barriers being created due to different prices between countries being required for profitable trading.
Nixon’s fourth issue was again related to a country’s ability to run an expansionary fiscal policy : he noted that it would be much easier for governments if they didn’t have to worry about inflation and could simply print money in order to stimulate their economies.
His final point about why America needed to break with gold is worth quoting at length: [Since I am not prepared to dissolve gold clause contracts,… [I] have determined that there must be no tampering with our currency…[and t]here must be no devaluation of the American dollar or anything that looks like a devaluation.
President Nixon Abolishes The Gold Standard
On August 15, 1971, in an effort to combat inflation, President Richard Nixon announced that he was taking the United States off of what is known as a gold standard. This meant that dollars would no longer be convertible into gold. This change led to a number of significant changes in our monetary system and way of life over time. However, it has not always been easy for people to understand why or how these changes took place, we are going to explore exactly why gold backed currency disappeared from America, and how it affects us today!
Many believe that when President Nixon took us off of a gold standard that it was bad, because it meant that our currency would no longer be tied to something real. However, while it may have seemed like a good idea at first, there are several reasons why removing us from gold actually created some very serious problems! Today we’re going to explore exactly what led up to Nixon’s decision and how his actions changed American money forever. We’ll also look at how these changes affected our economy and business world in general – and even found their way into popular culture as well!
There are a number of reasons why President Nixon removed us from gold, but they all came down to his desire to combat inflation. Some economists and financial experts will say that what he actually did was not only detrimental, but created an entirely new set of problems for our economy! Understanding exactly how removing gold from our currency works can help you gain valuable insight into some of today’s biggest economic issues. To start with, we have to look at why many people wanted to tie money to gold in order to begin with. When countries tied their currency (or money) directly to gold it made their money more stable because it tied things down firmly.
In 1971, to combat inflation, Richard Nixon announced that he was taking America off of a gold standard. This meant that dollars would no longer be convertible into gold. Most people think that when you take away something tangible like gold (something you can hold in your hand) that it’s bad – because it means your currency is not tied to anything real. However, while it may have seemed like a good idea at first, there are several reasons why removing us from gold actually created some very serious problems!