Just about all of the world’s national currencies in circulation today consist of paper or fiat currencies that have been assigned value by official decree or fiat, rather than due to any real intrinsic value they may possess, other than perhaps the ability to generate a significant amount of heat when burned. Furthermore, these currencies represent the debt of a country, rather than any real store of value.
Many people have become concerned about the ability of such debt based paper currencies to retain their value over time in comparison to hard currencies with well-established intrinsic value like silver and gold.
Regular inflation or price increases have persisted over many years in most developed countries due to this gradual loss of confidence, with the result being a general reduction in the spending power that such paper currencies command.
Bretton Woods System Used Gold to Establish Value for the U.S. Dollar
Most people have become accustomed to this gradual erosion in the purchasing power of the U.S. dollar and other debt based paper currencies. Nevertheless, this unfortunate situation that eats away at personal savings was not always the case, since the U.S. Dollar had at one time been on the Gold Standard until it was unilaterally removed by then-President Richard Nixon in the early 1970’s.
Under the Bretton Woods system of fixed or pegged exchange rates, which persisted from 1944 until that Nixon Shock occurred, the value of the world’s major currencies was fixed to the value of the U.S. Dollar, which in turn had its value fixed to the value of gold.
The fixed price of gold established by that system was $35 per troy ounce — a far cry from today’s price in excess of $1,600 per troy ounce.
Recent Gold Standard Critics Include Ben Bernanke
Despite the many advantages of the Gold Standard in terms of keeping the purchasing power of a paper currency stable over time, some people in high places still apparently disagree with the wisdom of maintaining such a currency system.
One such notable — and perhaps self-interested — individual is Federal Reserve Bank Chairman Ben Bernanke. In a recent educational lecture he gave at George Washington University, Bernanke first acknowledged that the Gold Standard could be considered an alternative to a central bank like the privately owned Federal Reserve.
Bernanke’s Issues With a Pseudo-Gold Standard
Nevertheless, Bernanke characterizes a ‘Pseudo-Gold Standard’. He is referring one type of Gold Standard that was not credible because it had a fixed exchange rate and was further accompanied by fractional reserve banking. By forcing a country implementing it to maintain a fixed exchange rate, this limits their monetary policy options and their ability to adjust the country’s money supply to changing economic conditions. Apparently, pseudo-Gold Standards are much the same the current ‘dollar’ standard we experience today.
He also pointed out that any lack of credibility on the part of a country using the Pseudo-Gold Standard could be met with speculative attacks on its currency, and that a lack of supply of gold could reduce the country’s money supply and prompt deflation. The only reason why the base-less monetary has not yet collapsed is that central banks can manufacture more, until the ultimate day of reckoning –meanwhile further destabilizing the system.
Bernanke also took up the Great Depression and mentioned in his lecture that the result of that troubling economic period was the removal of the U.S. Dollar from the Gold Standard by President Roosevelt in 1933 so that the Fed could legally expand the U.S. money supply, although the provision of nationwide deposit insurance for U.S. bank deposits probably had more of a favorable impact on depositor confidence.
Furthermore, Bernanke noted that the ‘Pseudo-Gold-Standard’ certainly did not prevent the Great Depression, and admitted that the central bank probably actually exacerbated that financial crisis by keeping monetary policy far too tight during that period and “providing only minimal credit to banks”, which resulted in rampant bank failures that closed almost 10,000 banks, according to Bernanke.
Again, the real problem then (and today) is not the money itself, it is the fractional reserve lending that allows credit to build to the point where the value of money (not money and credit) is entirely disconnected with the value of all things money should value.