The Gold Standard
Prior to World War 1 the classic gold standard model was used as a common basis used to establish a currency system. Gold was used as the basis of establishing the value for common currencies such as the British pound, German mark, and the United States dollar. For example, the US dollar was equal to the value of one twentieth of an ounce of gold and the pound sterling was closer to one-quarter of an ounce of gold. The exchange rate between currencies was then a matter of comparing the ratio of equivalent weights of gold that each currency represented.
Using gold as the basis of currency at that time allowed the governments of those currencies and banks to redeem all money in gold coin on demand. This allowed the general public to use gold coin or bullion when conducting their everyday purchasing transactions. As business and personal credit lines were provided by the banking institutions, the gold standard placed harsh limits to help prevent overuse of banking leverage since the holder of the currency had the rights to redeem the liability that they owned at any time.
This created concerns however if a country such as the United States, for example, was to create new dollar bills, thereby inflating the supply of dollars, this would have the effect of increasing or inflating the cost of United States goods. This would have the effect of reducing their competitive edge against the importing of goods from other currencies.
It became common practice for the US government to print more paper money to provide more credit during a period that led to only small price increases within the USA economy. In effect, the USA was in effect exporting their inflation to other countries as other countries would adjust their currency exchange to the dollar rather than adjusting their currency to gold.
This gold standard currency and inflation squeeze led to the Bretton Woods system for managing the money system between currencies of independent countries. The Bretton Woods conference was attended by 44 countries to establish the agreement to provide a methodology for managing the international monetary system.
In the early 1970’s, other countries became increasingly concerned with the ability of United States to reduce their budget and trim the trade deficits that were rapidly increasing. On August 15, 1971 President Nixon effectively took the USA off of the gold standard by executive order. This order essentially made the dollar non-convertible to gold in the direct exchange.
This executive order by President Nixon effectively created a dollar currency that was a fiat currency, in that it was not backed by gold or any other tangible basis other than the backing of the USA’s treasury and the Federal Reserve.
This led to renewed discussion in 2012 after the worldwide recession beginning in 2008 for adoption of a new world currency system. Additional vehicles for financial investment of precious metals were common in 2012 including gold IRA’s as a popular means for the average USA investor to minimize the impacts that the dollar inflation was having on their retirement investment portfolio. This has become one of the best investments in 2014 and in the foreseeable future.