The monetary system we live in can seem very complex. This is understandable as it has evolved over many years and there are many things that can confuse people. So let’s take a look at what you need to know about the monetary system.
The gold standard
The gold standard was a way of expressing the value of a currency in a monetary system. The standard economic measure was thus gold. The value of a currency, which is used as a unit of account, was derived from a defined quantity of gold. In the USA, the gold standard was adopted in 1834 at a rate of USD 20.67 per ounce. However, the United States produced more and more paper money and in 1971 President Nixon finally decided to abandon the gold standard. Currently, no world currency is backed by gold. However that was not the first time the gold standard was abolished.
In 1913, the Fed (Federal Reserve) was created as a result of a situation, when banks in the US issued more money than was in reality backed by gold. There was a chain reaction, a collapse, and people lost their money. JPMorgan then bought up much of the financial sector very cheaply. Twenty years after the introduction of the Fed (August 5, 1933 to be exact), the gold standard was abolished under Franklin D. Roosevelt. This was the height of the Depression. Unemployment was over 28%. So then came Executive Order 6102, which required every citizen to turn in all of their gold under a fine of up to $10,000, 10 years in prison, or both. After the war, in 1944, the Bretton Woods monetary system was established by the victorious powers to link the US dollar back to gold and other currencies to the US dollar.
The Bretton Woods monetary system
This monetary system operated from 1944 to 1971. It is a system of regulating international monetary relations based on a fixed exchange rate regime. Each member country had to maintain an exchange rate fluctuation of one percent around the pari value expressed in US dollars. This agreement was thus the first global monetary constitution. At the same time, the U.S. dollar gained global reserve currency status. The dollar itself was fixed as 1/35th of an ounce of gold. However, dollars could be exchanged for gold by banks, but not by individuals.
However, the United States government produced more paper money than this exchange rate corresponded to. Thus, other countries reacted to this fact by wanting to exchange dollars for gold, and because of this, the U.S. lost its monetary gold. The system still worked for a very long time, but then began to break down, and by 1971, gold was abandoned for good.
Of course, there’s much more to discover about the history of our modern monetary systems. It is necessary to know the full beginnings, when the currency was backed by gold and what was the reason for the abolition of the gold standard.