Monetary Systems & The World’s Reserve Currency

By studying history, it is possible to learn how past civilizations have risen and fallen. Repeated mistakes have been made throughout time. These mistakes show us how monetary systems within societies have broken down and collapsed since money was first used.

The Past –

History can show us many things; let’s take the rise and fall of the Roman Empire. The Romans rose to power in 64 AD. by starting out on a solid financial footing. There was a sound money system in place. They started off using 100 percent solid gold and silver coins as a medium of exchange for goods and services. As time passed however, more and more social programs needed funding. More major government projects were taken on, along with more and more wars being fought. The costs for all these wars and projects were mounting to where the amount of debt created exceeds the roman empires ability to pay it back.

With crushing debt now upon the Roman society, from over 130 years of fiscal abuse, the current Emperor would be forced to start de-basing the currency supply. In 193 AD. and throughout the next 40 years the Roman Emperor Sevairian was debasing the money and removing the gold and silver from the coins by as much as 50 percent. Now costs started increasing, they continued to increase as more of the currency was debased by stripping the precious metals from the coins.

The last remnants from the great Roman Empire finally ended, when Emperor Arailan in 274 AD. stripped the remaining gold and silver in the coins down to five percent. At this point the Roman gold and silver denarius had virtually no intrinsic value. Rome fell.

Today –

In a parallel context to Rome, today here in the United States we have been in our own silver coinage debasement. Starting out in 1965 the US. Treasury started removing the silver content out of all the quarters and dimes. Finally by the mid 1970’s the treasury managed to take all of the silver coins out of circulation.

A more recent example of modern fiat money going bad would be the Zimbabwe dollar. In 1980 one Zimbabwe dollar was worth $1.47 to one US dollar. Fast forward to 2008, and 100 trillion Zimbabwe dollars are equal to $0.000 000 000 000 01 of one US dollar. Their currency became completely worthless.

Classical Gold Standard -

After the civil war ended the United States entered the period of the classical gold standard starting in the mid 1870’s and lasting through 1917. During this time, it was bankers that were controlling the supply of gold. The banks had the gold under their control up until the gold rush started at the turn of the century. This is a time when gold was used as money. World War I saw the collapse of the classical gold standard mainly because many countries were forced to finance the enormous costs of the war with debt.

Gold Exchange Standard -

After World War I through World War II the Gold Exchange Standard went into place. The United States nationalized the public’s gold in 1933 by executive order signed by President Franklin D. Roosevelt. At this time all of the public’s gold that was returned, was melted down and then stored at Fort Knox. Where it was held in reserve and used to back the US dollar with 22 percent gold. The remainder of the public’s gold was horded away and never turned in. Consequently, nobody was ever sent to jail for non-compliance of the executive order. Today there are thousands of pre-1933 gold coins still around.

Bretton Woods Agreement -

World War II came around and at the end of it in 1944 the new Bretton Woods Agreement was signed. This allowed the US dollar to also become the world’s reserve currency. All other national fiat currencies were to be back by US dollars. The US dollar would be backed by 10 percent gold at $35.00 per ounce from the gold reserves held at Fort Knox. From this point forward the world saw much war, entitlement spending and currency expansions. President Richard Nixon in 1971 was then forced to shut down the gold window or face losing all the gold reserves still held at Fort Knox, due to the high demand of nations exchanging their dollars back for gold.

Dollar Standard -

Once the gold window was closed in 1971 the entire global monetary system became fiat, along with the world’s reserve currency. This changed everything overnight and now the world has been on the dollar standard ever since.

We have briefly reviewed America’s monetary systems over the past 130 years. Each system typically lasted no longer than 40 years.

• Classical Gold Standard – 30 to 40 years
• Gold Exchange Standard – 30 years
• Bretton Woods Agreement – 28 years
• Dollar Standard – 40+ years.

How long will it take, and what will be the final catalyst that creates the new monetary system? There is no exact answer here, however one thing that is very clear to me, the dollar’s days as the world’s reserve currency are numbered.

It took more than 200 years for the United States to build up its M2 money supply to over $800 billion dollars. That equals all the money in every persons pockets and all the cash in the economy combined. However in less than 2-1/2 years, starting in 2008, we increased the M2 money supply to over $2.2 trillion dollars. That’s over a 2.5 times increase, in just as many years via Bernanke’s printing press.

In preparation ahead of the financial chaos that is coming, it is a must that people safeguard their assets with “real money”. Real money is physical gold or silver. This acts as a hedge against any adverse economic conditions, including hyperinflation and the destruction of paper money. These precious metals will hold their true value while constantly adjusting to all economic conditions with no counter party risks. So in the end you will have 100 percent financial insurance and peace of mind.

Tom Genot –
 

Photo Credits: Federal Reserve Building – entablature – By Tim Evanson [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons