One of the basic problems humans have encountered since the dawn of time is how to exchange goods and services for a known value.
If I owned a goat, but I needed a knife, would I exchange the whole goat or just half of it for the knife? How can I do this without a comparison or a way of knowing what the knife is worth? What happens to the other half of the goat – and what if I learn the knife was only worth a quarter of the goat - how do I get a refund?
Over millennia, the solution we came up with was to use precious metals – gold and silver – as a benchmark of value.
An exact weight, or piece of gold or silver in a known format – like a coin – became the standard way of comparing prices. A coin had a specific value and acted as a means of exchange.
This was much tidier to deal with than lots of disparate, subjective, constantly changing things like "a bushel of wheat" or "a ton of oak."
It was only logical that when paper money was created, to overcome the necessity of carrying heavy coinage and bullion and transporting it, the notes were "pegged" to the value of gold or silver. This meant that we could exchange the paper money for a known quantity of precious metal and give it solidity, tangibility, and fungibility.
The concept of “paper” backed by precious metal became known as a "standard."
Historically, silver has been used as the primary currency and unit of account for domestic economies. Silver coins were widely accepted and used in the payment of wages and salaries, as well as most local retail trade for centuries across the world.
Gold was also used as money, but it was not until the 18th century that economic systems using gold as the sole currency and unit of account emerged.
This was because of problems such as divisibility.
Gold coins were too small and rare to be practical for daily transactions. Silver coins could easily be used for daily labor costs and food purchases. Because of their lower value, there were more silver coins in circulation.
As a result, a bimetallic standard, which combined gold and silver currencies, was widely adopted until the 19th century.
This system allowed people to use either gold or silver depending on their preference or needs at any given time.
Using gold as money began as early as 600 BCE in Asia Minor and the metal has since become a widely accepted form of currency.
However, it wasn’t until the 19th century that tools such as divisibility became practical. This made it possible for gold to function effectively as a currency and unit of account for daily transactions and displace silver.
In 1873, the German Empire switched from the South German gulden and the silver North German thaler to the gold German mark. This was the beginning of the worldwide classical gold standard.
In light of the consensus reached at the monetary conferences of the 1860s, Germany made this choice. At the conclusion of the Franco-Prussian War, Germany spent the 5 billion gold francs (equivalent to 4.05 billion marks or 1,451 metric tons) in reparations sought from France.
As a result of this change by a major, centralized European economy, other European nations also made the changeover to gold in the 1870s, and the Latin Monetary Union stopped minting limitless quantities of silver 5-franc coins.
During this time, several monetary systems made the transition from silver or bimetallic currencies to gold, including the British Empire.
Following Austria’s lead, several other nations made the change, including Belgium, Denmark, France, Italy, the Netherlands, and Sweden.
Stability in international trade and commerce, as well as increased economic activity in Europe and the United States, were made possible by the international adoption of a classical gold standard.
As a result of this gold standard's fixed exchange rates, the world's price levels began to rise and fall in sync with each other because of the new “automated” balance of payments.
The United States dollar had also been a major currency in the world for decades. It was the first currency to be used across all the newly formed United States of America, and gold backed it until 1933.
After a joint resolution was enacted by Congress on June 5, 1933, creditors could no longer demand gold as payment.
Since 1879, with the exception of a gold export embargo during World War I, the United States has been on a gold standard; however, widespread bank failures in the 1930s caused the public to panic and hoard gold, making the policy unsustainable.
President Roosevelt ordered a countrywide bank moratorium shortly after taking office in March 1933 in order to avoid a run on the banks by customers who lacked faith in the economy. He also prohibited banks from paying out or exporting gold.
This settled the markets - until the Second World War.
War doesn't come cheap, and all major economies found themselves faced with unsustainable debt.
At the end of the war, the gold standard was revived, and the Bretton Woods agreement was set up.
These two measures became an international monetary system based on fixed exchange rates backed by central banks and set against principal currencies like the U.S Dollar and British Pound Sterling.
It allowed nations taking part to maintain convertibility between different currencies without using surplus foreign exchange reserves or speculative capital flows. Both governments and businesses used this new global system for foreign exchange transactions over decades.
But, in 1971, President Nixon suspended all dollar-related transactions backed by gold in response to increasing price instability. This was due to inflationary pressures domestically and abroad, the Vietnam War, and increased government spending.
Aggressive social welfare programs and high defense costs fueled this spending on projects such as missile defense throughout Europe during the final years of the "Cold War."
The Fed then hit on inflation and juggling with interest rates as a financial weapon, and a "fiat" currency - backed by only a government promise to pay - was the perfect solution to the debt spiral the U.S. found itself in.
If it needed money - it simply printed it.
And the rest, as they say, is history …
We'll leave you with just two numbers:
Recently, U.S. debt topped $32,500,000,000,000 - that's around $95,000 for each citizen.
Since 1960, Congress has allowed the raising of the debt limit 78 times - and there seems no sign of this stopping anytime soon.
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