“We have gold because we cannot trust governments”
Herbert Hoover, president of the United States of America (1933)
The dollar is, without a doubt, the most important currency in the world, used by nations around the world as the main reserve currency to protect the stability of their currencies. It is a reference currency for pricing raw materials and commodities, and as a means of payment and settlement at a global level.
But how did we get here? What is the story behind the almighty dollar? And, above all, where does its extraordinary strength come from?
The story behind this reality, told in three acts, allows us to understand the risks of the current monetary system built over the last hundred years around the dollar.
Act One: The Gold Standard
The “gold standard” is a monetary system where countries back the value of their currency with gold. Under the gold standard, countries agree to convert their paper money into gold. In other words, under this system gold supports the value of paper currency.
What makes the gold standard attractive is that it prevents money issuance from being based on arbitrary decisions made by governments. With a backing of physical gold acting as a limit to the issuance of money, a society can, in a simple way, keep itself far from the blows of inflation.
The international gold standard emerged in 1871, following its adoption by Germany. By 1900, most developed nations had their currencies tied to the gold standard. Ironically, the United States was one of the last countries to adopt it.
In the decades before World War I, international trade was carried out under the gold standard. In this system, trade between nations was settled in physical gold. Nations with export surpluses accumulated gold as a result of their exports. By contrast, nations with export deficits saw their gold reserves shrink as they paid for their imports.
Act Two: “In gold we trust”
When the Second World War was about to end, the main powers of the West met to develop the Bretton Woods Agreement, a system whereby the value of all the participating nations’ currencies would be set in relation to the dollar, thus becoming the main reference and reserve currency. The dollar, in turn, would be convertible into gold, at a rate of $35 dollars per ounce.
Through the Bretton Woods system, the international financial system continued -indirectly- to operate under the gold standard.
Act Three: Broken Promise
The Bretton Woods Agreement began to collapse in 1968, when the participating nations, concerned about the Vietnam War and its high cost to the US economy, began demanding the conversion of their US dollars into gold. In the following years, both Belgium and the Netherlands converted their dollar reserves into gold, while Germany and France expressed similar intentions. In August 1971, Great Britain requested the conversion of its dollars into gold, forcing the intervention of the United States government.
In 1971 President Nixon temporarily halted the convertibility of the dollar into gold. With this decision, the international currency market, which had become increasingly dependent on the dollar since the Bretton Woods Agreement, lost its formal connection with gold. The US dollar, and by extension the global financial system built on it, lost all gold backing and entered the era of fiat currency, supported only by trust in that country.
More than 50 years have passed since the "temporary" measure decreed by Nixon. The dollar never regained its gold backing. In these 50 years, the dollar has lost 98% of its value against gold, going from a parity of $35 dollars per ounce to more than $1,800 dollars per ounce of gold.
Aktagold helps middle-class individuals around the world protect their money from inflation, devaluation, and exchange controls. Aktagold allows them to convert their savings into physical gold, oblivious to the risks of their country of origin, and protect it in the safest vaults in Europe.
Contact us to receive more information and find out how your money can be better protected.