By 1932, the Dow Jones had dropped 89.4% from its peak. In response, President Roosevelt moved to take the U.S. dollar off the gold standard.
It’s one of the most commonly cited events in the history of the U.S. dollar. But not the only one…
You see, four decades later, President Nixon broke the dollar even further away from gold. In 1971, he declared the U.S. would no longer convert dollars into gold for foreign governments.
The U.S. had been on a gold standard since 1879. Cutting the dollar’s last ties to gold is in part why the U.S. government can now print trillions of dollars overnight.
But there’s much more to the story…
Over the next few issues of Money Trends, we’ll look into the history of money – and the role different types of currencies have played over time. It’s something every investor should know…
Money’s Changing Nature
So many people take the concept of money for granted – without understanding why, or how, we have the current system in place today.
The truth is that money in our present time has far more of an ephemeral nature than ever before.
It used to take a lot of time and effort to make money. We used to extract gold from the earth and then melt it and shape it into bars or coins.
Today, all we have to do is effectively punch in a string of digital ones and zeroes. And somehow, we have all agreed that slips of paper – which can be easily lost or destroyed – represent the value of those electronic ones and zeroes that fill our digital bank accounts.
But why does this distinction matter? The answers are greed and excess.
You see, the prospects of laying claim to scarce resources and establishing economic superiority has been a constant in human history. There are clearly no limits to what people will do for money.
From the numerous wars and conflicts fought since the advent of recorded history 5,000 years ago… to the California Gold Rush of the 1800s… human behavior has always been shaped by greed.
I’m going to be a bit philosophical here… There is nothing inherently wrong with greed. Greed can motivate us to provide for our families and seek better opportunities for ourselves.
With virtually anything that we do, it is excess that is harmful.
The tricky thing with greed is how addictive it can be. Once you have a taste of it, there is no stopping that thirst for more.
It is exactly this thirst that is responsible for the evolution of money as we know it today.
The Origins of Money
The earliest origins of money can be traced back to ancient markets where the barter system was used to trade for goods. People would trade livestock for grain. Or grain for cloth.
There was no standard for how much a bolt of cloth was worth relative to a cow or a pig. It was up to each party to decide the relative worth of the goods they were bartering for.
The barter system quickly led to the creation of accounting. Each party that wanted to trade for something would have their own account of debits and credits. This was undoubtedly born out of the first merchant to say to another, “I’ll owe you one, buddy.”
The bigger question, however, was what exactly did one merchant owe another? After all, the grain merchant might have no need for livestock.
To put things in a present-day perspective, imagine going to a mall in America and trying to pay for something using Malaysian ringgits.
This brings us to a key point: All money, whether commodity-backed or fiat, must have an agreed-upon value by all parties involved in the transaction.
And that leads us to the longstanding use of precious metals as a form of money… and the implications for investors now that the nature of money has changed.
More to come…
Editor, Money Trends
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