History of U.S. Currency: From the Gold Standard to Crypto
Gold standard. Fiat currency. Cryptocurrency. What do these all mean, and how do they affect you?
The United States has seen a sea change in its monetary policy over the past century. As financial advisors, we sometimes geek out on the history of U.S. currency (ever heard of the Revolutionary War phrase “Not worth a Continental”?). Still, we’ll focus on current themes in this article for brevity’s sake. Hopefully, you’ll come away with a better supply of how your money works and where it may be headed.
The Gold Standard
Periodically, you’ll hear politicians and some economists advocate for the return of a gold standard. But what does that mean?
A country that adopts a gold standard means that its currency must be backed by gold in reserve. The government cannot increase the money supply without increasing its gold supply.
The United States adhered to a gold standard from 1879 until 1933—when President Roosevelt ran up against the standard’s limitations. The country was mired in the Great Depression and facing unemployment, gold hoarding, and deflation of the U.S. dollar.
To stimulate the economy, Roosevelt eliminated the gold standard. This allowed the government to pump money into the economy, which parallels the current Federal Reserve’s actions during this COVID-19 pandemic.
In 1971, President Nixon barred foreign governments from trading U.S. dollars for gold, thus severing the gold standard completely.
The Fiat Money System
The currency system that replaced the gold standard is the one we have now. No commodity backs fiat currency. You can’t trade in gold or silver notes and get the corresponding metal.
Instead, fiat currency is backed by the strength and authority of the government. Our dollars are legal tender because our government mandates them as such.
Fiat currency critics say the system creates inflation and government debt. But advocates say it helps the government right the economy in recessions or depressions, as Roosevelt did in the Great Depression.
As the article ”Fiat Currency: What It Is and Why It’s Better Than a Gold Standard” notes on The Motley Fool website:
“By severing the tie between a commodity that people tend to hoard in times of crisis and the value and supply of money, a fiat currency is a better alternative, but only so long as those pulling the levers of monetary supply keep the balance between supply and demand stable.”
We’ve watched the Federal Reserve strive—and many say stumble—to keep that balance during the coronavirus pandemic. It pumped stimulus money into the economy to keep it afloat. Now, with inflation rising (such inflation is a key criticism by gold standard advocates), the Fed stands to increase interest rates to slow down spending.
The government couldn’t have taken such actions if we were still on the gold standard. And whether you think that’s good or bad depends on where you fall in the debate.
The Rise of Virtual Currency
Enter the new contender: cryptocurrency. But is it really a contender? Right now, we’d argue that it isn’t, and here’s why:
No central government manages any of the cryptocurrencies. The asset is decentralized and offered by sometimes anonymous providers. In some ways, it is like the gold standard with its supply limitations. For example, the number of Bitcoins is limited to 21 million.
All of this means that a country cannot effectively use this “currency” to combat economic crises. The technology is promising, and research is ongoing into currencies backed by central banks. For example, this month, the Federal Reserve reported that it is considering a digital dollar.
But the reality right now is that most people do not use cryptocurrency to pay for their goods and services. It is not government-backed but rather market-backed. And because of this, it is vulnerable to daily up-and-down swings. This kind of volatility is not tenable for a currency you’d depend on for your everyday life. As cryptocurrency stands now, it is an investment at best and speculation at worst.
Final Thoughts
Now is an interesting time to watch this article’s themes play out in a pandemic-impacted economy and a red-hot, often speculative market.
We’ve covered how to cope with inflation and help protect against market corrections. If you want personalized advice, our fiduciary wealth management firm in Roseville and Folsom, CA, offers comprehensive financial planning and investment management.
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This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.