Gold and how the history of currency unfolds

When I realized that the value of paper money that we use today is no longer based on paper, I decided to find more information regarding the history of our currency. My initial thought was that the paper money we use is backed by physical gold. I was wrong! (yikes!)

Since August 15^th, 1971, the paper money we use is no longer associated with gold. The authorities halted convertibility between the US Dollar and gold. This essentially broke the long-established Bretton Woods agreement since 1944.

Once the Bretton Woods agreement was no longer honoured, the paper money is called as fiat money, which translates to ‘it shall be’ in Latin. In other words, the printed money is no longer backed by physical assets. Rather the money is based purely on trust imposed by the authority.

Before 1971, every dollar in the United States of America had to have the backing of gold. For every troy ounce of gold (31.1 grams), a total of USD35 was allowed to be printed. Therefore, the printed monies serve as vouchers to facilitate day-to-day transactions. If the paper money serves only as a voucher, technically, the actual money is none other than gold.

The manipulation of our monetary system

The question here is, why did the authority stop the convertibility between gold and the US Dollar? From the earlier passage, we understand that there has to be physical gold to support the conversion for every dollar. However, the United States of America was having an economic crunch while being involved in the Vietnam war, and they needed so much money to support these expenses. This desperation led them to find ways to manipulate the system. The easy solution was to stop the convertibility between gold and the US Dollar.

Hence since 1971, Dollar money was allowed to be printed as the authority felt so, simply because no more physical gold was required. This is why the United States of America is the richest and most powerful country today (though the same spot is being flirted by China regularly). According to financial expert Michael Maloney, the creation of ‘fiat’ money is the biggest lie in the history of humanity.

This trick was not new, to be honest. Such phenomena have occurred previously in the Greek and Roman governments from our history. Even in the local context, during the Japanese Occupation, the excessive money which was printed eventually became worthless due to hyperinflation. People's wealth was ‘robbed’ away by the authority, leaving them helpless.

Flat gold price over a hundred years

If we look at the gold chart extracted from the Kitco website (www.kitco.com), we would notice that before 1968, the gold price was relatively flat for over a hundred years since 1833. Why would that be? Was it due to the low demand for gold back then?

The answer to this question is rather straightforward. Then, gold was utilized strictly as money. Despite paper monies being the major mode of transaction, the value of money was inherently derived from gold. The paper monies were merely vouchers, and the gold price was not affected throughout this duration.

Let us revisit our own experience, shall we?

'Entrepreneurship Day' during school days

Remember when we were back in school, there was an event where we had to set up stalls, sell candies, snacks, or drinks. We even called it ‘Entrepreneurship’ Day or something like that. The objective was to expose us to the world of entrepreneurship and give us a glimpse of the hassle of running a business. Do you remember those times?

Could you recall the ‘currency’ used to complete the transactions during this event? Was it the pocket money that we received from our parents? No. We used different colour-coded coupons (with different values attached to them). And we need to exchange our pocket money to get these coupons, right?

The coupons we used during the events were not money per se, but they were essential to complete all transactions. Similarly, that was how gold was used back then. Before 1971, paper money represented nothing but the value of gold that we own. Hence, gold is real money.

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Hope you find it useful.

Your buddy on gold investing,

Naresh G