If the Dollar Isn’t Backed by Gold, What Happens Next?

Nixon, gold standard, debased currencyBefore 1971, the dollar was backed by gold. In the 1960s, French President, Charles de Gaulle, saw the United States spending on the Great Society and the Vietnam War and started getting a little bit leery of the U.S. government spending all this cash. President de Gaulle took action to protect France from the wild spending of the United States, and France started trading its dollars for gold, pushing the U.S. to the brink. By 1971, the draining of gold was unsustainable. Either the U.S. had to slow its spending or sever the link between gold and the dollar. Thus, Nixon chose to preserve spending and closed the gold window, ending the gold standard with one quick swipe of the pen.

A Post-Gold Currency

In the 40+ years since, the world has been on a fiat currency system, meaning nothing is backing the dollar, yen, euro, etc., except the faith of the people using the stuff. The monetary system is overdue for a major correction after four decades of the current fiat system. It’s likely to happen soon and abruptly. Historically, the monetary system changes every 30 to 40 years. The last one was in 1971, of course. Before that, it was in 1944 with the Brenton Woods Accord, where all the currencies of the world were pegged to the U.S. dollar (at that point, the U.S. dollar was still pegged to gold). Prior to that, the last change was in 1913 with the introduction of the Federal Reserve.

When will the next correction be?

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The likelihood is that, very soon, we’re going to see some sort of gold-backed currency again. It’s unlikely to be the dollar (at least not a first), simply because doing so would restrain federal spending. It’s more likely to be a currency from a country with a positive trade surplus like China and/or one that has an abundance of natural resources like Australia or Canada. The country adopting some type of gold standard first is likely to do a partially backed gold currency, which means every dollar or equivalent would be backed by, say, $0.25 worth of gold. This would be a fractional system, a 10% backing of the currency with gold. Whichever country does this first will transform their currency into the global leader of stability, precisely as the U.S. dollar was for nearly a century.

Historical Perspective

Gold and silver started off as a commodity money. This means the commodity is actually used as money. In this case, gold and silver coins were used as money and exchanged directly for goods and services. The next evolution was a receipt system where the commodity was put into a depository or bank and the owner received a receipt. People started trading the receipts, because it was easier than carrying around the metals. The receipts were portable and 100% backed by gold and silver, something real and tangible. The receipts were treated as money and could be freely exchanged for the actual gold or silver at any time. The certificates were strictly representative of the actual gold and silver supply, so every certificate was backed by an actual commodity.

commodities dollar, commodity gold, gold vs dollar

That was the nature of the banking system until the banks started playing games with pure one-to-one backing and, out of pure greed, created fractional reserve lending. The bankers realized people weren’t actually coming back to get the gold and silver, but instead were just trading the certificates or receipts. The bankers realized they could print more certificates and loan them out, charge interest, and make more profits based on something they created out of thin air. This type of plan would work unless people panicked and wanted their gold back. If the bankers printed twice as many receipts as they had gold for and all the receipt holders demanded gold for their receipts at the same time, the bank would fail.

Fractional Reserve Lending

The system of issuing more receipts or currency than the bank has the reserves to cover is called fractional reserve lending, and it’s rampant all over the planet today. The difference today is that the actual gold backing the receipts has been eliminated from the equation. The banks now have deposits of currency that they lend out, but they lend multiples of what they have on deposit. They lend “money” out to people that is made up out of thin air. For more on this, please pick up a copy of G. Edward Griffin’s book, The Creature from Jekyll Island.

During the most recent financial crisis, fractional reserve lending was as high as 42 to 1. That means the banks lent out 42 times as much currency as they had in reserve. In some cases, the reserve went to zero, so the bank didn’t have to have any type of reserve at all. The banks just created money and lent it. They made profits from interest charged on loans of money they didn’t even have. That’s essentially what you have in your bank account, made-up cash that doesn’t exist. There is nothing backing it.

This can seem a little crazy, and it is! That’s why gold and silver—physical gold and silver—are so fascinating and so important, because they’re real and can’t be manipulated by anything like the fractional reserve system. The reason central bankers and banks in general don’t like gold and silver is because it’s impossible to play games and make up money if the money is gold and silver. The banks lose their power to scam the populace.