Will We Return To A Gold Standard?
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning “let it be done”, because such money is established by government order. Where fiat money is used as currency, the term fiat currency is used. With such drastic and rapid rise in the prices of silver and gold, and the plummeting value of many fiat currencies, specifically the US Dollar, the question has been posed if a gold standard would be repeated again soon. The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold, with various meanings depending on whether gold coins, bullion or exchange with silver coins are used as the fixed mass. A look through history will show that each time fiat currencies have been adopted, the gold standard reappeared not long after. Below are summaries of historical periods of this return to gold:
1785-1861: Concerned about a proliferation of paper currency, the founding fathers of the United States reinstated the gold standard as the way to put limitation on the production and circulation of money.
1862-79: The Civil War’s exorbitant cost was paid for by fiat currency referred to as Greenbacks. With the severe depression of the 1870s, gold standard was once again revived.
1880-1914: When the gold standard was in effect during this 34 year period, domestic prices were stable and there was almost no observable inflation.
1915-25: “Floating fiat currency” came into circulation, driven by the financial needs of the First World War. Since there was not sufficient gold to back the amount of paper currencies that were being printed, the fiat currency was floated for 10 years.
1926-31: Tied to the gold-convertible British pound and US dollar, the gold standard rose yet again.
1931-45: The Second World War and the subsequent Great Depression gave rise to global imbalances, which resulted in another period of floating fiat currencies.
1945-71: As determined by the Bretton Woods agreement, the world tied itself to the US dollar and the British pound. However, the pound soon collapsed due to the rush of trading pounds for gold. 1963 saw the printing and circulation of New Federal Reserve notes, which didn’t promise payment in “lawful money”. Once the Coinage Act of 1965 was signed, the use of silver currency came to an end. In 1968, a proclamation issued by President Johnson declared that no further Federal Reserve Silver Certificates could be converted into silver.
15 August 1971: The international gold standard came to an end, courtesy of President Nixon. This was the first time when no currency was backed by gold.
1971-73: The Smithsonian agreement established a fixed dollar standard where world currencies were linked to the US dollar, and not gold.
1973-Today: The US dollar serves as the world’s currency reserve in the present system of floating currency rates, established by the Basel Accord.
Conclusion: Though the US dollar is still the world’s reserve currency, high inflation rates and the instability of the dollar may soon force the world to go back to a gold standard.
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