50 Years Without a Gold Standard: fiat currency post-Bretton Woods Agreement, as discussed in Rickards’ book: “The New Case for Gold”
Yesterday, Sunday, August 15th, marked a significant time stamp in the history books, as 50 years since the fall of the Bretton Woods Agreement and gold-backed US currency.
The Agreement of 1944 was the beginning of a foreign exchange system that promoted economic growth on an international scale, forged as a safe-guard against the devaluation of the dollar (USD). Perhaps more importantly, the resulting social cohesion among independent states after WWII was vital for stabilising market volatility on a wider scale.
However, this came with the caveat that all participating countries would peg the respective value of their currencies to the dollar.
Considering the importance of the Agreement retrospectively, the global reliance and exchange of the dollar have largely contributed to its existence as a major currency, currently involved in over 80% of all foreign exchange transactions.
With an end to the Bretton Woods Agreement in 1971 during Nixon’s presidential campaign, foreign currencies became free-floating on the foreign exchange market, as was the case for larger economies like Great Britain, Japan and the US.
Without the ability for the American citizens to claim gold as before, investors looked for private intermediaries to house their gold or to participate in high-risk strategies like Exchange-traded funds (ETFs).
The New Case for Gold
Despite the eradication of the gold standard in 1971, it is clear that the enduring value of this precious metal persists today.
According to him, the process of separating gold from the dollar confirmed rather than undermined gold as a lucrative asset for preserving value. Whether that value is intrinsic or subjective, humanity’s usage of gold as a currency throughout time can be pinned to its pre-requisite properties of “scarcity, malleability, inertness, durability, and uniformity.”
His title recognises the renewed importance of monetary systems based on gold, saying:
“In the absence of an official gold standard, individuals should go on a personal gold standard by buying gold to preserve their wealth”
While the rationale behind a personal gold standard is varied, this pursuit entails low-risk investment in a stable asset that can provide a safe-guard against inflationary threats. In times of global crises, investors look to gold as a “safe haven”, since it is an asset increasing in value rather than depreciating.
The Future of Gold
Post Bretton Woods Agreement, it is certain that the future of money is digital. Clearly, the move towards decentralized digital asset management is becoming a widespread reality for those seeking to diversify their portfolio.
As central banks follow suit with digital currencies set to represent fiat, the direction towards digital rather than paper money is already well underway.
As Rickards mentions in an interview about his new release, the answer of a digital gold-backed currency with an accompanying debit card to spend owned gold would bring back a new kind of gold standard.
Making gold a spendable asset, rather than a hoarded one, enables its circulation in the wider economy. This means that gold can be defined as money in terms of a store of value but also a medium of exchange and unit of account.
A New Bretton Woods Agreement
Going forward, the future of gold and gold-backed currency is already in progress. However, whether the gold standard will be introduced to currency on a global scale is another matter.
One of the reasons the Agreement fell was the great undervaluing of the price of gold, which meant that gold production would not be sufficient to provide the resources to finance the growth of global trade.
However, as Rickards highlights, when gold is priced on an analytical, not political basis, this enables its sustainable endurance as a form of money.
The Kinesis Solution
At the time of speaking, he notes that gold was historically a non-yield producing asset, sitting stagnant in vaulted infrastructure for long periods of time. This made it impractical for daily use and inaccessible as an exchangeable asset.
However, the Kinesis system participants can not only store their gold with zero fees but can also generate a yield, whether it is spent or simply held in a user’s wallet.
Rather than a Monetary System built on principles of risk or debt, yields are acquired from mutual transaction fees drawn from the entire Kinesis ecosystem.
Whether the future monetary policy will mimic the principles of the Bretton Woods Agreement is uncertain, but a global want for fair and ethical monetary systems is without question.