For thousands of years, gold had been valued for its scarcity, beauty, malleability, uniformity and permanence. All five factors contributed to its use in jewelry. Three factors, scarcity, uniformity and permanence, made it useful as collateral for paper
money. In July 1944, delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference. There, they signed the Bretton Woods Agreements.
The key element of these agreements was to codify gold as the backing for all Allied nations’ currencies. U.S.
money
was pegged at thirty-five dollars to one ounce of gold, and all other nations’ currencies ultimately were de facto pegged to the U.S. dollar.
The word “backing” is a synonym for “collateral.” The backing for a debt is its collateral. The paper dollar bill, also known as a “federal reserve note,” is a debt instrument signifying an obligation of the U.S. government. (“Bill” and “note” are words signifying debt.)
The reality that all U.S.
money
is
debt,
and conversely, all financial
debt
is
money,
is not understood by those who wish to reduce the amount of U.S.
debt.
Doing so would reduce the amount of U.S.
money
and cause a
depression.
In fact, on six separate occasions, when the federal government attempted to reduce its
debt,
i.e., reduce the amount of federal
money
in circulation, the U.S. experienced
depressions.* Bretton Woods’ primary failure was not allowing for national flexibility in the money growth necessary for economic growth. In 1940, U.S. public debt was more than $40 billion. Today, it is about $9.5 trillion, a 200-fold increase. Were Bretton Woods still in effect, the U.S. would need 200 times more gold than it owned then, an impossible scenario.
The other flaw relates to gold’s limited intrinsic value. It is a commodity, much like copper, iron and diamonds, but with less usefulness. Its price results more from history and convention than from underlying utility value. For that reason, gold was a weak form of collateral that never could protect the value of paper
money. Faced with the alternatives of inadequate
money
growth leading to recessions and
depressions
vs. removing the fiction that gold somehow protected
money,
President Nixon, in 1971, chose the latter and removed gold as the collateral for the dollar. As a result, gold has no relationship to the U.S. dollar, and the federal government has gained the unlimited ability to create
money,
which it does by creating
debt. The word “debt” contains such negative inferences, that politicians, the media and even some economists, who should know better, continually call for a reduction in federal
debt.
“Reduce federal
debt"
is another way to say, “Reduce the
money
supply,” an act that repeatedly has caused the abovementioned
depressions. Today, the collateral for the dollar is the U.S. government’s promise of full faith and credit, a seemingly insubstantial collateral, but one with much greater safety than gold provided. This promise tells the holder of federal government
debt
he can use that
debt
to buy anything in America and to pay his federal, state and local taxes -- two key attributes gold could not provide.
While gold backed
money
for thousands of years, it has been only a few decades since it was divorced from
money.
Old habits are hard to break, so some people and some nations (the U.S. included) continue to hoard gold, under the erroneous belief there is financial safety in this yellow metal. They would be far wiser to hoard copper or fresh drinking water, both of which have far more utility than gold.
FREE MONEY explains more about the relationship between gold and
money.
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