The date was June 5, 1933. The United States was in the midst of the Great Depression, when President Franklin Delano Roosevelt announced that the country was going off the gold standard. What exactly did that mean? Since 1879, the US had been on the monetary system that directly links a currency’s value to that of gold. Meaning, any creditor who was owed a payment could demand that payment be made in gold. In addition, a country on the gold standard cannot increase the amount of money in circulation without also increasing its gold reserves. Basically, the amount of paper money had to equal the amount of gold in reserve.
That same year, the government took in nearly $800 million worth of gold coins and certificates from citizens in exchange for paper money. The value for these transactions was set at $20.67 per ounce. While the link between paper money and gold was all but severed by Roosevelt, the government did allow foreign nations to exchange US dollars for gold until August 15, 1971 when President Richard Nixon abruptly ended this practice. The value of gold at that time was $35 per ounce.
So why was this done, and what does being off the gold standard mean to you? Many economists believe the US would not have been able to get out of the Great Depression were it not for this move. It allowed the Federal Reserve to flood the market with paper money in order to stimulate the economy. When there is more money available, people spend more. And when people spend more, it ignites the economy to grow and recover. You may have also noticed this was a tactic the Federal Reserve employed in 2008 during the Great Recession, as well as today in 2020. Previously, this tactic would not have been possible. That’s because prior to 1933, paper money was essentially an IOU. When a dollar, or bank note, was passed from one person to another, it was backed by the fact that the money was worth its value because it was backed by gold. Ever notice that even on your currency today, it still has the words Federal Reserve Note printed on every bill? While it’s true that paper money is the current legal tender, there is not nearly enough gold to back the dollars in circulation anymore. As of early 2020, the US gold in reserve was valued at $408 billion, while the dollars in circulation were valued at nearly $2 trillion!
The fact that the $20 bill in your pocket is worth the same amount as a regular piece of notebook paper, is a lot for people to handle. The truth is, the only thing that allows us to trade the $20 bill for goods and services is the faith and trust in the US government. Because it is no longer backed by something tangible like gold, we are all operating on a promise that the $20 bill will be able to buy something “real” like food, gas, clothes or a house.
But what do you think happens when the Federal Reserve continues to print paper money out of thin air with limited rules on the amount they can produce? Well, there is inflation. And that in turn makes each dollar less valuable. Here is a good example of inflation. Consider a loaf of bread. In 1930, it cost $.09. In 1970, $.25, in 1990, $.70, and today about $2.50. Did the value of the bread really go up, or did the value of the dollar go down?
As the value of our money becomes less and less, many people prefer to own what are called “hard assets”. Things like real estate, precious metals, and a variety of commodities. The value of the dollar has the potential to go to ZERO, and probably will. But tangible, hard assets rarely go to zero and often increase when the dollar goes down.
So what have we learned?
1. Paper currency has become fake and is only backed by a promise
2. The value of paper money continues to go down
3. Hard assets beat paper assets because of their tangible value
So when you have “cash” in hand, consider trading it for a tangible, hard asset that is likely to increase in value. Because if you save it, it will surely be worth less a day from now, a year from now, and a decade from now.
Contrary to the old saying, cash is NOT king!
