What is a Gold Standard ?

"We have gold because we cannot trust governments". Herbert Hoover

By the same reasoning governments can also force people to rid themselves of their gold and give them paper money or another currency in exchange. This happened in the US with the Emergency Banking Act of 1933 when Roosevelt was looking to edge the country by stabilizing the banking industry.

What is a gold standard ?

Paper money is so well accepted as an exchange medium that few people consider what a paper dollar is. It's a contract. It is a means of trading one good or service at a price today and holding the paper dollar contract for a period until another trade is to be implemented. The value of that paper dollar is worth more or less in the future. That is true in a free market where the paper dollar is not pegged to the price of an underlying commodity such as gold.

When a countries currency is pegged to a standard it continues to fluctuate in value but only to the extent of the underlyings value. When a gold standard is adopted by a country then that countries currency is worth as much as gold.

Paper money is fiat. It is worth nothing but the ink and paper that are used to make it or it is worth has much as the underlying financial asset which it is pegged to. If it is backed by nothing then it has no underlying fundamental value. In such a case the price of a fiat is based on the investors trust that the paper money will continue to be used in the future and that someone will trust that it is tradeable for a value that is close in price to what it was acquired at.

But paper money tends to make people nervous and when people lose confidence in a fiat they dump it like there was no tomorrow. The worst case scenario for a fiat is a period of hyper inflation as was seen in Germany in the early 1900's. Consider that within a year a person was paying the price of a house for a piece of bread and you begin to understand the weakness of fiat.

Back when England was the superpower and the British pound was the main currency of the world, paper money became a major problem. This had to do with creating debt with fiat as the underlying saviour. By 1821 England responded by imposing a gold standard. For some time all trades were carried out under the gold standard. Stockpiling gold became a means of measuring wealth and massive amounts of gold was mined and stocked in vaults for future use.

In 1871 Germany followed suit and soon most nations were playing the trading game by the rules of a gold standard. The US lagged in their decision to join the movement towards a gold standard. They were the last major country to play along.

In 1821 the Industrial Revolution was in it's infancy. Steam engines and iron led the way for railroads, automobiles, and airplanes. Factories were the new way of mass producing goods that were shipped worldwide and traded at a standard gold quote.

1914 comes along and the world is in mass disagreement. Americas role in the industrial revolution has made them rich and powerful and they have become as great an influence on world economic balance as their former overlords from the old World. The first world war breaks out and the gold standard contract is also about to be broken.

Countries of the world look to the US and England for financial security and the fiat of both these nations becomes the reserve currencies of the world. Buying currency with gold means that the US and the Brit gold vaults are getting fat, as are those of other leading nations, including France. Most smaller countries give up their gold for paper currency.

War is costly however. England pays a great price and lose much of their wealth. The US dollar eventually remains the only reserve currency.

In 1918 the first world war ends and people think that no war could ever be so atrocious. There is a global sentiment that the worst is behind them and the 1920's is a period of high rolling and high risk, over leveraged speculation. It is a period where people overdose on buying debt.

1929 comes along and a sudden shock of reality instills itself in the minds of those gamblers who are holding debt held on an underlying paper currency. Suddenly everyone is rushing to trade their paper money for gold bullion as they watch the stock markets plunge into the abyss.

England uses its gold reserves to pay off war debts leaving the US and France as major gold holding countries.

In 1931 England breaks away from the gold standard.

1933 comes along and the Roosevelt administration forces the gold out of their pockets by enforcing a new legislation where gold is to be converted to paper money. This is a rule and not a request.

In 1934 Gold in the US is revalued to 35 dollars and ounce from 20.67 which means that the American citizen who was given fiat for their gold, and who looked to buy new gold would have taken a nearly 2 to 1 depreciation on their trade.

In 1939 the US had a lock on gold reserves. They held a vast majority of the gold supply already mined and enough gold to back the printing of untold volumes of fiat which was being bought by global players of the economic game. In 1939 Hitler was forming his Aryan nation on the presumption that he would lead the Germans away from a system of hyper inflation which they'd witnessed when the Deutsch Mark was rendered worthless. Amongst his many promises he convinced his followers that they would move towards a Utopian society.

But the world would have no such thing.

The second world war ended in 1945 after the US joined the Brits and Churchill. As it was ending the international bankers were signing on to the Bretton Woods Agreement which was a new gold standard where the American dollar was sold on the gold reserves held in the American vaults.

However by the mid 1960's much of the gold from the US pegged at 35 dollars an ounce was being challenged by international gold which was being traded on a fluctuating or floating price market. The debt bought on paper currency ( US dollars ) was no longer finding a fair underlying value and the American Bretton Woods gold standard was being revamped.

In 1971 central banks worldwide were no longer seeking gold as an underlying commodity to appraise the value of fiat paper money.

The gold standard was no more.