I want to explain something, that I think most of you will find beneficial ( much of the material reworded from Wikipedia ) as well bring it “up to speed” as to what it means in today’s day and age. This might go on for a couple of posts.
After WWII the “international financial powers that be” agreed to create a system wherein the U.S Dollar was placed deliberately as the anchor of the system, with the US government guaranteeing that every US dollar held in reserve – could be exchanged at a fixed rate for gold.
Everyone agreed to use a single currency ( the U.S Dollar ) for international trade, and that those dollars could be exchanged for a “fixed rate of 35 dollars” for an ounce of gold.
This is what is meant by a “gold backed” currency, providing holders of that currency the “confidence” that the pieces of paper in their hands are “actually worth something”…that something being gold.
For every dollar on the planet an equal amount / value in gold, should the holder of that dollar choose to own gold instead.
Got it? Excellent.
This made things “relatively” straight forward as countries around the world “pegged” their local currency to the U.S Dollar, and the U.S Dollar was pegged to the price of gold.
Price “stability” had been established.
So for the first years after World War II, the system worked well as foreigners wanted dollars in order to spend on American goods such as cars, steel “manufactured” in the U.S.
The U.S. owned over half the world’s official gold reserves ( 574 million ounces at the end of World War II ) so the system appeared secure.
Well….by around 1966 ( due to excessive spending by the U.S for the Vietnam War as well many domestic programs ) the U.S realized that foreign banks reserves had grown to about $14 billion dollars, while the United States had only $13.2 billion in gold reserve. Of those reserves, only $3.2 billion was able to cover foreign holdings as the rest was covering domestic holdings.
essentially the U.S had printed ” a few too many dollars” to cover the actual amount of physical gold held in their vaults.
Soon foreign countries ( holding depreciating USD ) began demanding redemption of these dollars for “real gold”. Switzerland redeemed $50 million, then France acquired $191 million etc until finally on the afternoon of Friday, August 13, 1971 President Nixon “literally pulled the rug out from under the system” ( The Nixon Shock ) and closed the gold window – forbidding foreign holders of U.S Dollars from exchanging them for gold, essentially “sticking foreign holders of U.S Dollars” with a currency now set to be dramatically devalued.
The Nixon Shock unleashed enormous speculation against the dollar as you can imagine. With no gold behind them, the value of “boatloads” of U.S Dollars distributed world wide……..now put into question.
I promise I’ll skip the middle part…and get this up to what’s happening in the world “right now” with China’s movement/interests in particular.
Does it mean will make USD get strengten? If so which currencies will get affected?
Can I answer that? …No, the fact that dollar is not backed by gold anymore will not make USD stronger… 🙂
No…really, what was mentioned in this article that suggest stronger dollar?
Kong, this is good summary of what happend with gold backing, I think every trader already know this well, this was actually first think what I researched when I started trading…(didnt help me with trading though). We all are using paper money backed by nothing!!! … and surprisingly this system still has not colapsed yet? Still wondering how much time fiat currencies have, world seems to be pretty tolerant to money printing.
Hang tight everyone…..I’m going in a different direction with this now that everyone has the basics.
Yes yes…the history of it all ( we traders “better” know this ) frankly doesn’t do much for me but does provide framework for those now looking to understand “what the hell is going on with currencies / gold etc?”
I’m going directly to China with this next bit……… so hopefully it will be enlightening.
If you know what China is up to, please share with us. I hope they’re going to use accumulated gold wisely, new currency backed by gold would certainly move fiat currency markets…hehe….
We should all thank Nixon, or else we wouldn’t have much of a Forex market to trade today since back then “countries around the world pegged their local currency to the U.S Dollar, and the U.S Dollar was pegged to the price of gold.” Just looking at the silver line here. lol
Yes the creation of what we now know as the “forex market”…a beautiful thing no question.
Hopefully for those just getting “caught up” we’ve now established that “once the gold standard was lifted” currencies essentially began to “trade freely”, putting into even sharper focus – the means / ability for a country ( of even greater importance the U.S being the new found reserve currency ) to “print money”.
“silver lining” I mean.