Both the dollar and the euro are losing their strength. What does this mean for the future of currency? Gold The Currency Of The Future?
As actors in the world’s largest economy, business owners need to reflect on the important role that trust plays in our daily activities. Every transaction requires that a certain level of trust be placed on others with whom we have little or no direct connection. Simply refilling a prescription at a pharmacy requires you to trust with your life the source of the raw materials, the pill manufacturer and the pharmacist.
If you lose trust in any of the links in this supply chain, the entire system breaks down. Such is the case with currencies. Paper money has no intrinsic value. Those rectangular pieces of paper can’t make decisions, build something, satisfy hunger or cure disease. Their only value is based on our belief that a stranger will give us something that does have intrinsic value in exchange for that piece of paper.
This trust has recently been put to the test. Both the U.S. Dollar and the Euro are losing value right now due to the condition of the underlying economies that support them. A significant percentage of holders of these currencies keep them only because there are few alternatives available. This hardly helps to inspire confidence. It is unlikely, given current trends, that we can expect significant improvements in the condition of the U.S. or European economies in the foreseeable future.
Gold as currency
Gold has retained its value for centuries. It’s difficult to imagine a time when gold was not regarded as valuable by societies. After World War II, the Bretton Woods Agreements instituted a gold exchange standard for the world’s major currencies. Under this system, currencies had a fixed exchange rate relative to the U.S. dollar and the dollar in turn was valued at approximately 0.0286 ounces of gold. Under this system the U.S. government promised that for every $35 in circulation an ounce of gold was being held in reserve. And since other currencies were fixed against the dollar in effect all currencies were exchangeable for gold.
This gave currencies a certain underlying support that went beyond simple trust in the economies that printed them. During a period of economic uncertainty in the late 1960s and early 1970s many governments, investors and speculators began to lose trust in the dollar and started to exchange their dollar for gold in batches of tens and even hundreds of millions of dollars. Deciding that this situation was untenable, President Richard Nixon decided to end the pegging of the dollar to gold. He announced on August 15, 1971 that the U.S. government would no longer convert dollars into gold. As of that point, the value of a dollar was no longer backed by gold but instead by the “full faith and credit of the United States government”.
