The History Of Currency
The year 1875 was a special year with regards to the world financial system, though unless you happened to studied economical history, you probably wouldn’t even realise the significance of this year. For this was the year that the Gold Standard was first created!
What is the Gold Standard? Well before the year 1875, money was essentially gold and/or silver. A one ounce £1 coin had the same value as one ounce of gold and was subsequently backed by a piece of gold sitting in a safe in the Bank of England. Yet after 1875, the UK government with its vast oversea empire decided to switch to a Gold Standard, where instead of £1=1 ounce of gold, it shifted to ½ ounce of gold = £1.
Whilst this might not seem like much, the Gold Standard transformed the existence of money, in that governments could now determine how much money was worth. As such, if say ½ ounce of gold = £1, than effectively the Bank of England could print twice as money – which is exactly what the British government proceeded to do, as well as other governments overtime following suit with their own currency. With more money in existence, the value of the £ devalued and bankers, etc. were able to become wealthier in the process.
The Gold Standard of 1875 lasted till around the end of the First World War where due to heavy fighting with Germany and large amounts of money been printed for various military projects, it was decided that money would temporarily be suspended from gold, hence allowing the governments of the world to print as much money as required to fund the ever-increasing war bill.
After the Great War, a new Gold Standard was put in place, where £1 was now worth far less than one ounce of Gold; the reason for the further devaluing of the £1 was due to the excess amount of money which now existed in the economy due to all the printing which the west governments had done during the war. Unfortunately this Gold Standard also came to an abrupt end due to the onslaught of World War 2 and the need for massive printing of money to pay for even vaster military projects.
By the end of the Second World War, the economic situation of the world was completely different from before. The Great British Empire, backed by the almighty £ pound was now exhausted and drained. Britain as well as most other countries in Europe had pretty much run out of gold in its safes, having it being sent to America throughout the war as a means of payment for military help, etc. At the same time, America was now the economic powerhouse of the world, with most of the world’s gold reserves in safes throughout the US.
Towards the end of WWII when it was clear the allies were going to win, a meeting was held in Bretton Woods, USA amongst the allied governments to discuss the fact that most of the world’s gold was accumulating in US and disappearing from rest allied countries. The outcome of this meeting was the Bretton Woods agreement, where it was agreed that the US Dollar would now be the new reserve currency of the world, which would be directly pegged to gold. All the other currencies of the world would subsequently be pegged to the US dollar. This effectively gave rise to a new sort of Gold Standard, where the US dollar was the very heart of this standard.
From 1944 to 1971, this was the Gold Standard of the world, and up to date the last Gold Standard for during 1971, US president Richard Nixon made the decision with the US Treasury to break the link between the US Dollar and gold. Just like the brief period of time in both world wars, money was no longer backed by anything physical. In doing so, not only was the US Treasury allowed to create as much money as they so wished but as all the other worlds currencies were pegged to the US dollar, they to also become ‘Fiat Currencies’ – not backed by anything but government promise to uphold the value of the units of currency.
Up to the present day, this has being the current standard of money, referred to as the Dollar Standard due to the fact that the US dollar is still the reserve currency of the world, though the only thing backing it is the US Treasury and FED (America’s central bank).
If you have kept up to date with the financial news over the last several years, then you would be well aware of the fact that the many people and governments are becoming uneasy with the idea of their currencies being pegged to a currency which itself is not backed by anything. This concern was further compounded during the Great Recession, when the US financial markets almost failed. Had they failed however and the repercussions would of being global as all the other world’s financial markets and currencies are solely pegged to the US Dollar, etc.
In an upcoming hub, I will reveal in greater detail why many economists are concerned as to the world’s currencies not being back a precious metal (Gold, Silver) and what the global repercussions could be should the US Dollar actually fail.