Before there was the U.S Dollar acting as the world’s reserve currency there was an almost universally accepted form of money since the beginning of recorded history: GOLD. Paper currencies were originally pegged to gold to give them value. The bearer of the originally paper currencies could exchange it for precious metals, that is where currencies use to derive their value from. Gold standards use to be monetary policy in which the total value of issued money was represented in a store of gold reserves by the nation issuing a currency. Not until the 1930’s did governments start the process of discontinuing gold certificates and gold coinage. The last gold certificate and gold coin currencies were issued in the U.S. in 1932. In Europe, most countries left the gold standard with the start of World War I in 1914 and, with huge war debts, did not return to gold as a medium of exchange.

After World War II gold was replaced by a system of convertible currency following the Bretton Woods system. Gold standards and the direct convertibility of currencies to gold have been abandoned by world governments, being replaced by fiat currency in their place. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar. On August 15th, 1971, the United States  terminated convertibility of the U.S. dollar to gold. This brought the Bretton Woods system to an end and saw the U.S. dollar become a fiat currency. This action created the situation in which the United States dollar became a reserve currency used by many nations. At the same time, many fixed currencies also became free-floating instead of being pegged to gold. This also gave birth to the Forex markets where currencies values floated against other currencies and market forces decided valuations based primarily on interest rate policies of central banks.

With this being the case now it means that paper currency no longer has any real intrinsic value beyond the belief of the citizens that use it in transactions. While fiat currency is now allowed to float in value against gold. As a result of throwing off fiscal responsibility and printing as needed fiat currencies are now designed to devalue as more and more currency chases fewer and fewer goods. The result has been disastrous and inflationary for those holding and saving currency as its value deteriorates. After gold no longer backed the U.S. dollar $100,000 worth of goods in 1971 would now cost $576,780 in 2013 due to the erosion of the dollars buying power. Since August 15th 1971, until today gold has gone up 3,138% while the the U.S. dollars buying power has decreased year after year. Converting paper currencies to gold has been a winning proposition since the gold peg was removed in 1971. Gold has been an amazing investment for the past 15 years especially with a flight from fiat currencies to the safety of precious metals. For those wanting to own the physical precious metal gold yourself is the place to start further research for ownership.


By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.