The History of Paper Money – The Gold Standard – Extra History – #6

The History of Paper Money – The Gold Standard – Extra History – #6


In this series, we rarely get far into the 20th Century because it’s hard to have historical perspective on events that are that close to our own time. But today, we’re gonna have to roar in to the latter half of the 20th Century to show you just recently this idea came to be. This idea that seems so normal, that we all take for granted, as if it were always the case. The idea that money is worth something because we all agree it is. Last time, we talked about the growth of central banks as a patch system to fix the numerous problems that occur when you introduce paper money as the basis for an economy. But for many people, one more step was required to really inspire confidence in this idea of taking milled tree bark in return for their labor, and that was the Gold Standard. The Gold Standard is basically the idea that your paper money is backed in gold, that at any time you could take your paper bill somewhere and redeem them for a specified amount of gold. Now I hear a lot of you say: “Why would you ever do that? Doesn’t putting a currency on the gold standard just mean that we’re back to the problem we were trying to solve in the first place? By tying money to gold aren’t we once again limiting the money supply?” The short answer to that is: And we’re going to see just how that plays out. The longer answer is: “Ehh… sort of.” This is a pretty complicated economic question. Too complex to really get into here but the concthe concise version is that having paper money backed in gold rather than using gold directly allows far more options when you need to expand the money supply. And it has the advantage of letting you play fast and loose with the system when you need to. But still, why would you do this rather than have your currency float free? Well, that’s where history comes in. You see, the Gold Standard solves two major problems. The first is inflation. As you can probably guess, it wasn’t long after people started printing paper money that they figured that they could just print a lot of paper money. Way more paper money than they could ever redeem. Way more than even our fractional reserve banking system thinks is sane. As soon as people did that you started to get inflation, and it could still happen even with the central currency controlled by the government. Because when countries needed to say pay for an army, they would sometimes just print more bills to do it. More bills means that each bill is worth less. Which was a problem, not only for those poor citizens whose life savings were now in paper bills, but also for other countries who’d been accepting those paper bills in exchange for their goods. Which brings us to the second major issue that the Gold Standard addresses: exchange rates. Right as paper money was becoming the standard in Europe, international trade was really starting to pick up. The Industrial Revolution was getting into full swing and raw materials and finished goods had to be shipped and traded at a pace never before seen. Simultaneously, mercantilism (that isolationist monetary policy that we discussed in an earlier episode) is coming to an end, causing trade to rocket to even greater heights. But what happens when your ship full of cargo docks in some foreign port, and you try to hand the local merchant your funny green paper money to buy their goods, while they try to hand you their funny pink paper money to buy what you’ve got on your ship? Well you both just sit there scratching your heads for a while. Back in the day, you would have just weighed whatever coins they were trying to give you, and accept them for their weight in gold. But now they’re handing you this piece of paper that you don’t recognize and you have no idea how to value. I mean, can you even trade this specific piece of paper for anything when you get back home? But if both currencies are on the Gold Standard, problem solved. Just as an example, let’s say that at any time you could turn in 20 US dollars to get one ounce of gold. 1oz of gold is what your $20 are worth. Now let’s say you sail to England where (for the sake of keeping things simple) the UK has set their gold standard so that an ounce of gold is worth two British pounds. This makes everything nice and simple. Since you’re both operating on the Gold Standard, that means 1 British pound is the equivalent in value to 10 US dollars. Done and done. Simple. So how does this all fall apart? Well first we have to talk about how it all began. If you saw our episodes on the first Opium War, remember how we talked about the fact that all of Britain’s silver was flowing into China to buy tea? Well, to solve all the problems I just talked about, the British were looking for some commodity to back the Bank of England notes with. But with all their silver gone, the British chose gold. And soon basically everybody followed suit. But this system had its own breaking points. Absolute adherence to the gold standard had to be suspended several times during the 1800s, due to the massive expenses incurred by international war. But in England, as in most other countries, there was always a return to the gold standard in peace time, with countries working to build their gold reserves back up, and limiting the printing of further notes. Other minor shocks llike the California Gold Rush other introductions of massive new sources of gold would cause the system to lurch. But, overall, use of the Gold Standard held up pretty well throughout the 19th century. Then came World War One. The Seminal Catastrophe. The shatterer of so many notions from our past. And like so many other things the Gold Standard crumpled under the impossible needs of the War. Nation after nation abandoned gold to print more money to pay for the arms, munitions and men that were being expended daily on the field. And as more and more money was printed and spent to feed the insatiable hunger of this war, trade became erratic. Trade from the United States grew far beyond what the gold reserves of Europe could bear. Inflation ran rampant. And after the war, many countries couldn’t drag themselves back to the Gold Standard. Some nations like Germany, who are spiraling into hyperinflation under the crushing debt of war reparations, tried to stabilize their currency by backing it in land rather than gold. Others like England appealed to people’s patriotism and renched themselves back onto the Gold Standard by asking people not to redeem their money for gold, just out of love of country. But even this fell apart as the Great Depression hit. Those few countries that had the wherewithal to stay on the Gold Standard like the United States were now hamstrung by how the inflexibility of gold prevented them from reacting to the crisis. And yet many people and many nations thought of this as a temporary hiccup. “Sure the War and the Depression had made a mess of things, but soon the good times would be back, things would get sorted out and everybody would get back on the Gold Standard. I mean, they had to, right? Without the Gold Standard, how is money worth anything?” But those good times didn’t have a chance to come back because then came the big one. World War Two. World War Two was perhaps the most expensive war in history. Economically, it was totally unsustainable, with the US racking up enormous trade surpluses and every other country involved sinking into massive debt. But the world had learned from World War One. And as World War Two round down, many of the major powers met to work out the first real international monetary agreement. The famous Bretton Woods System. You see, following the first World War, Britain had owed the US a huge pile of money, which they couldn’t pay back unless France paid them a huge pile of money it owed them. But much of the war had occurred on French soil, and the French couldn’t afford to pay back the British unless they basically made the defeated Germans pay for everything. This of course had all been a disaster that caused huge financial and political instability. So this time around, things would be different. Reparations would be minimized. Repayment of reparations would be on gentler terms. And that whole problem of wildly unstable currency caused by countries like Germany no longer being able to adhere to the Gold Standard after World War One? This time the currency instability problem would be solved. And how would it be solved? Well at this point in history the US basically had everybody’s gold, because everybody had bought a ton of stuff from the US for the two biggest wars in history. So the US actually WAS still on the Gold Standard. So the solution was simple. Peg everybody else’s currency to the US dollar. That’s right, the system essentially boiled down to: the US dollar is redeemable in gold, and all other currencies are redeemable in US dollars. And so every country had to keep some Dollars on hand to redeem their currency, which is how the US dollar became the reserve currency for basically the entire world. As other nations’ economies recovered, the Dollar became overvalued. This came to a head in 1965. Charles de Gaulle, who had always been a little bit miffy about America’s position in the world, decided that he was going to act on that redeemability. So he sent the French Navy to cash in and pick up his bullion, literally bringing boatloads of gold back to France. Soon other nations followed suit. By 1971, with the Dollar still overvalued and the Cold War and wars like Korea and Vietnam draining US resources and sending US gold overseas, Richard Nixon finally took the step that many argued had to come, and took the US dollar off the Gold Standard. Just… take that in for a moment. 1971. Less than 50 years ago. But here’s where it gets good. When Nixon pulled the US off the Gold Standard, the shock was felt around the world but it didn’t stop many countries from still pegging their currency to the US dollar. So now you had currencies around the world redeemable for US dollars and the US dollar pegged to nothing. Soon many other countries decided just to let their currencies float, to let them be valued at what the market would bear. And so, just like that, almost by accident, after 6,000 years, we finally accepted money as an idea rather than a thing. Or as John Law would say: “we accepted money as the medium by which things are exchanged, not the value for which they are.” Thanks for watching. We’ll see you next time. … and when we find ourselves in the place just right twill be in the valley of love and delight

100 Comments

  1. And then bitcoin happened, and it's value in real currency was determined solely by how much people wanted it. And then people decided it was worth enough, and they sold it, screwing everyone else who bought in too late.

  2. There is more to the story than just this. Reality 101 = the money (fiat currency of countries that have fiat currency) has value because all taxes and governmental fees must be paid in that currency. Thus: since a farmer can not pay his taxes in corn or wheat (he must pay it in US dollars), he needs to get some of that stuff! This means that governments create money by spending it into existence and then destroy money by taxing it back out. The implications of this are detailed in Modern Monetary Theory (MMT). There are a few good, online treatises on this subject, especially by finance professors from University of Missouri at Kansas City (UMKC).

  3. So it was war and bombing all of the other developed nations industries that "made America Great".

    Considering how inflated the prices of diamonds are, I don't think Gold is that much better. Maybe when the economy is doing really well and it's cheaper.

  4. I guess the Dutch are still mercantilist, we buy a lot of raw goods, refine them and then sell the refined goods! Rotterdam Port yeah!

  5. Excellent series. Debt notes are not money. Money is a claim on the past, like gold or rice and beans in hand. Debt notes are a claim on an unknown imaginary future where I will get paid, maybe, in an unknown value. Gold is money. All else is credit. So said J.P. Morgan. 1907.

  6. I wouldn't mind on continue with getting into the nitty-gritty of how the bank of England was nearly broken, back in the early 90's

  7. Now we just need to get rid of money, but that means the world needs to unite under one county. That way people do jobs they want to do, and the objects just go where needed, but this also means we need robots (or people still wanting to do dumb labor) around, And stores would be replaced with a big area where people just dump the things they've made or collected. The only problem is this is based off of goodwill, something mankind has yet to adopt.

  8. This series is golden. You answered alot of questions i had from my economic classes. I think economic curriculums should focus more on the history as you did to let students appreciate the various standards we have today. Thank you for these amazing videos!

  9. Ok, so if I understand all of this right, we (The U.S.A.) are f$%&ed next World War! Other countries, important ones, are hammering out ways to get away from the "Petro Dollar", AND make better/cheaper MIL products and equipment, eliminating the U.S.A. as the seemingly standard supplier. The Gold Standard went by the way side of the $US being the reserve of the world, then of course, that morphed into the "Petro Dollar". So the current "Petro Dollar Standard" is doomed, AND so is the market for our weapons. Yup, we're f$%&ed! How hard is it to learn Russian and Mandarin?

  10. Fractional reserve banking is fraud, and the US dollar not pegged on gold is an even bigger fraud. The US is allowed to print as much as they want, and people can't keep their money else it'd be devalued sharply in a couple of years. Hyperinflation also can happen thanks to this. The world needs to go back to the gold standard

  11. That was a very American perspective I have to say. Essentially the narrator presents it as a big success that the world has now come to depend on US dollars that are backed by nothing. It certainly gives the US a dominant role in the world economy, but you probably have to be American to celebrate that fact as an unqualified success for all mankind. He also seemed to celebrate fractional reserve banking because "it allows the economy to grow". Sure. We saw just how much you can "grow the economy" based on fractional reserve lending in the years leading up to the financial crisis of 2008. Sub prime loans anybody? The fact that there's nothing to back these highly leveraged bank loans when the credit bubble pops got brushed off as a minor detail.

  12. us europe japan trade cotton flax indigofera+tinctoria silk+floss sage ~~~~ mitsumata edgeworthia+chrysantha Oriental+paperbush Oriental+paper+bush ~~ containerization AND (interactive marketing) AND (brand attitude)

  13. Interesting. A video series that shows the shell game that is modern fiat currencies. Demonstrating that all the errors in the gold standard were errors of greedy people (mostly bankers) trying to levy personal wealth from flawed ideologies (fractional reserve banking) or governments spending more than they have to fund wars that they often cause and create. Then some people (the wealthy) secure more wealth from the government via sales of arms and national debt. A famous quote by Adam Smith is "Give me control of a nations money and I care not who makes its laws" yet central banks operate almost universally without government control or much oversight (please by all means prove me wrong with some facts not your "faith" in the system). And when I try to tell people that the government is nothing more than a puppet show for the masses (the poor) I am almost always told to take off my tinfoil hat. The worst part is this video implies it is a good thing that fiat currency inflation (caused by the daily printing of money and its arbitrarily controlled value through artificially high interest rates) that makes personal debt more valuable than savings because fiat currency value is in a state of constant steady decline. Cost of living increase anyone? Slavery didn't end it just has a new face.

  14. Maybe an episode 7 is in order: How the Basel Capital Accords (1988) standardised money creation globally and killed inflation in the 21st Century…

  15. I just watched all the videos. In my opinion, USA president Nixon did a bad thing (I understand why he did it in the first place and I think most of us would did the same). If US dollar is worth nothing, so as most of our world currencies, wouldn't it be a problem in an economy crisis at future (which, I hope, we will avoid..)? I mean, what if US (or any other country) hits a new "depression" wave, which spreads worldwide (which I hope won't be the case) again, like in 2009? How will US, and the other countries (like European ones, China and etc.) fight the crisis? If we print more money, inflation will increase and make it worst! We need to create a new, stable standart for all world's countries, so we could redeem US dollars, euros and other money to stabilise the economy and prepare for the future. Maybe this might help us to avoid bigger problems in present or future.
    This is only my opinion and I might be wrong, since I am just a guy who has interests in history and economy. If somebody has an answer tell me. If I am wrong, please, correct me and explain more, I am willing to hear your opinions and learn! 🙂

  16. so rather than, we let people let comfy with the idea to the point they dont want to change anymore because it would be a big hassle

  17. And now the US prints money to no end, and people ditch a now continuing worthless US dollar for a growth back Chinese Yuan…

  18. It's a ironic that gold (apart from golden teeth) hadn't had real, practical value until we needed it to build into CPU's. And one of the main serious job of those CPU's is tell how much money, both gold and cash, both real and partly or completely virtual, you have at any moment in time, and help to spend it… even more than you have.

  19. I don't completely get it. the world wars were possible even if the money paid for them had no value. it's like if everyone starts working more hours then the total payments would be higher than the existing money and the printing of new money to pay the payments would lower the value of the work being done . that's a paradox to me what determines a works value? couldn't they just stop paying during the wars and instead just feed the populations? because in the end people work only to be fed.

  20. I forgot how clever the illustrations in these videos are. You remember stuff better when you're laughing, right? 😄

  21. This series is so interesting, do you know some books that have more detail on this topic? I really want to know more about money, and knowing the natural of money might be crucial for investment.

  22. In 1971 the Richest person in the world had 1.5 Billion. Now the richest person has 150 Billion. This trend isn't sustainable and when it fails the global currency won't have any real way to stop the fall.

  23. The Goldfingee movie was from 1964, while the gold standard was still around. If he had succeeded with his plan of making the gold at Fort Knox radioactive, what would have happened with the currency around the world?

  24. I'm just gonna leave this here ^_~
    https://www.youtube.com/watch?v=jgbY79Opn34&t=38s
    (about ecological overshoot, which is basically spending all the capital in a trust fund, except the trust fund is all of the planet's resources that we need to eat and breathe)

  25. Okay so… to sum up: humans initially were wary of currency, so they used a physical object to ensure that the currency meant something (since the object was a finite resource) but after time people needed more currency than the physical object could provide so they just… got rid of the physical object's tie to currency? and now the currency is determined by… something? I am confused.

  26. I actually have an example of how the value of money is our belief it works. My school had it's own private currency used to reward good behavior. I hated the idea and everything to go with it, so me and my friends said that it didn't have value. Bam! That currency wad worthless to us because it wasn't backed by anything, other than our belief it works.

  27. Only one thing wrong on this episode to keep the Dollar as King currency the U.S.A. pretty much created a monopoly on oil no oil trade in the world could be made unless U.S.A. dollars we're used it's not that all said meh leave it like it is the U.S.A. made sure it stayed the way it was

  28. Norway still use the gold standard, though getting your money redeemed in actual gold is only theoretically possible, I don't think the bank would actually allow you to do so

  29. In a way, fractional reserve currency and loose monetary policy seems to enable countries to fight wars that they otherwise could not afford. I suppose that the merits of those wars is a matter of debate.

  30. Just one correction. Bretton Woods actually failed because US citizens were investing abroad (Japan and Europe became excellent places to invest US dollars) giving more dollars to foreigners. The US gold reserves during the 1950-1970 stayed relatively stable, but it's dollar liabilities went from $10 b to $40 B while it's gold reserves stayed around $10 b –when valuing gold at 35 an ounce. Excellent series!!!

  31. Ive seen Hidden Secrets of Money. They make it very clear that no fiat currency in history has ever worked. All Fiat currencies all go to zero In the end.

  32. So the correct way to say is: "the money is losing it's value" when the products price rise, and not just that "things are getting more expensive".

  33. Qué hay del apoyo militar y el vínculo con el petróleo. Aquí falta información valiosa. No puedes decir que el dólar simplemente quedó papel de lotería, es falso. Hay una razón por la que Arabia Saudita y las OPEC operan de la forma como operan tan solo meses después de que Nixon formalizó la renuncia al oro. Es necesario citar a las fuentes para saber si estás siendo guiado por la mayoría de los teórico de conspiración que nunca han tomado un maldito curso de economía.

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