Dollar backed by gold?
In years past, the U.S. dollar was backed by gold, but this is no longer the case as the U.S. and most other nations now use a fiat system to back the value of their money.
Prior to 1933, the U.S. dollar was based on the gold standard, meaning that currency was required to be backed by a certain amount of gold. Under the gold standard, the government guaranteed the value of its money with gold. This also meant that nations redeemed their notes to other nations in gold and shared a fixed-currency relationship.
Starting in 1933, the U.S. government began breaking away from the gold standard, and the break was complete by 1971. Under the fiat system of money, money has value because the government says it does. It’s not linked to the value of gold or other stored assets.
After World War II, the Bretton Woods system linked the dollar’s value to gold. One dollar was pegged to 1/35th of a troy ounce of gold. The system pegged other currencies to the dollar at set rates. Under the Bretton Woods system, the U.S. pledged to redeem its dollars in gold to other nation’s central banks. Gold reserve exchanges were used to correct trade imbalances.
In 1971, the U.S. government ended the ability of other nations to convert dollars to gold. This change was brought about by foreign governments cashing in of their dollars for gold because of a flux of money printing by the U.S. to pay for a perceived lack of confidence in the government’s ability to reduce its expenditures and meet its obligations
The immediate impact of the end of gold convertability, called the Nixon Shock, was an end to rapidly increasing inflation and stabilization of the U.S. economy.
As with any financial reform, the unpegging of the dollar from gold had some long-term ramifications. Other nations followed the U.S. lead in unpegging their currency from gold and the impact was increased volatility and unregulated financialization. The value of the dollar became linked to perceived future value, causing the growth of credit default swaps and derivatives trading to allow nations and businesses to hedge risk.
But the bottom-line, common sense impact of the U.S. abandonment of the gold standard is this: money is only worth something because the government says it is, and the authority of the government to make this decree rests upon the trust that the government can meet its obligations. With rising deficits and two wars being funded on borrowed money, an increasing number of people worldwide are questioning the U.S. government’s ability to meet its obligations. This is why gold is a good investment for people who want to protect their wealth in a time of great economic uncertainty.
While it’s no longer used as a basis for currencies, gold remains a universally accepted measure of value, and many governments, including the U.S. keep reserves of gold. When all other investments and currencies seem to be on shaky ground, gold has continued to increase in value, making it a safe harbor in stormy economic times.
