In our gold standard series, we have covered how gold went from shiny rock to currency to international monetary standard and then to partial international standard. In this installment, we’ll explain its dramatic demise….
A Return to Gold … Sorta
We last left gold in 1934 with the United States returning to the gold standard after a brief wartime hiatus, and the United Kingdom leaving the gold standard for good.
Yet, even those in favor of the gold standard recognized its shakiness, revealed by World Wars I and II and the Great Depression. To address this, a 1944 conference in Bretton Woods, N.H., hosted delegates from 44 countries to establish a replacement of the gold standard, resulting in the Bretton Woods Agreement. This agreement pegged the U.S. dollar to gold at $35 an ounce, while all other currencies were pegged to the U.S. dollar. Because the gold-backed U.S. dollar was stable at the time, it enabled other nations more affected by World War II to stabilize their currency.
The Bretton Woods Agreement, officially launched in 1958, essentially made the U.S. dollar the global reserve currency as international banks now began to keep reserves of U.S. currency instead of gold. The conference also established the International Monetary Fund (IMF) and the World Bank, institutions that still exist today.
Nixon Nixes the Gold Standard
A period of relative stability and growth followed. But over time, the United States printed money that went beyond their gold reserves to finance the Vietnam War (1955-1975) and various policy initiatives. This reduced the value of American currency, and in turn, all currencies pegged to it. Eventually, Belgium and the Netherlands cashed in their U.S. dollars for gold, depleting gold reserves, and Germany and France expressed the same desire. To stop a run on gold, President Richard Nixon decoupled the U.S. dollar from gold in August 1971. Any remnants of the gold standard system were gone by 1976.
And Finally, Fiat
And so, our current fiat system, where monetary value is backed by a government, replaced the gold standard, where money is backed by gold. Gold, while no longer linked to currency, is still considered a financial asset.
Some background on terminology: A “fiat” is an authoritative determination or an arbitrary decree. So a fiat monetary system means a government has declared their currency has value and should be accepted as payment. The word comes from the Latin “fieri,” often translated as “it shall be” or “let it be done.”
Pros and Cons of Fiat
The fiat system is generally perceived as superior to the gold standard, which relies on a heavy, limited resource. Gold requires a great deal of labor and resources to mine–you can read more about it in our series on gold and crypto mining–while fiat has positive seigniorage, meaning the face value of the money exceeds the cost to produce it. It also gives governments greater control over supply, and therefore their economies, so they can avoid economic depressions.
But the drawback is evident: Paper is in abundant supply, and governments need only print on paper to create money. If they do this at too quick a pace, it can create hyperinflation. This occurred in Zimbabwe in the early 2000s, when irresponsible currency printing eventually led to a 100-trillion Zimbabwean dollar worth about 40 cents in U.S. currency. Over 70% of Argentines see cryptocurrency, particularly Bitcoin, as the most effective way to hedge against the country’s hyperinflation. Argentina Believes in Bitcoin and Cryptocurrency as Most Effective Hedge Against Inflation, Paxful Survey | Blockchain News
How Does Bitcoin Fit In?
Creators of cryptocurrency applied lessons learned from both the gold standard and fiat money to develop a new form of money. In fact, cryptocurrency was first envisioned by crypto-anarchists who distrusted the government and held little faith in currencies backed by them.
Various cryptocurrencies, most untethered to governments, emerged and failed through the years, until Bitcoin-creator Satoshi Nakamoto applied a central tenet of the gold standard to his cryptocurrency: limited supply. Once $21 million Bitcoins are in circulation, no more will be made.
Beyond that, Bitcoin is decentralized, and so, unconnected to a bank. It doesn’t present transport problems like gold does, which was especially problematic during World Wars I and II. You don’t need to ship crews to distant mining sites to excavate Bitcoins–it only requires humans and computers to produce. It also doesn’t struggle with the issues of hyperinflation like fiat currency does. In fact, over 70% of Argentines see cryptocurrency, particularly Bitcoin, as the most effective way to hedge against the country’s hyperinflation. In short, it solves many problems of previous currency systems and is particularly appealing in times of economic uncertainty, like the present, when the U.S. is deploying another $1.9 trillion in stimulus checks for the American Rescue Plan.
Sold on Bitcoin?
While some people buy gold as a safe haven asset, others prefer Bitcoin. If our history lesson has interested you in Bitcoin, check out our map for the nearest Coinsource Bitcoin ATM near you to convert your fiat currency (USD) to Bitcoin!