Where Did Money Actually Lose Its Value?

Money here refers to US Dollar.

Pre-Gold Standard Era

Money is actually a medium of exchange that represents some value. Earlier this value was represented by The Gold Standard(read more about the concept behind gold standard here).Under Gold Standard, though each country issued their own paper currencies, they had to be backed by gold. As such, Gold was the Reserve Currency, the currency kept by central banks in their foreign exchange reserves, for use in international trade.

Gold Standard Era

During World War II, The US became a safe haven for European gold hoards as a means of protection from Nazi plundering, thus positioning it to rewrite the rules of the global economic order. At the end of WW II, The Bretton Woods Conference was convened in the US, with all major economies as its delegates, and it decided to establish A Global Central Bank in USA(World Bank). Since the US held most of the world’s gold supply and the gold-backed Dollar was relatively stable, the delegates agreed to adopt the US dollar as the official reserve currency.

Beginning The Plunge: The Fiat Standard

US Dollar was the de-facto king of currencies as every country wanted it for foreign trade. It had good demand and thus value.

However, beginning the 70s, the US started printing more money to fund its war in Vietnam. There wasn’t enough gold to back this issuance. As such, the Government started printing money by backing it with other securities like Treasury Debt. In 1971, U.S. Pres. Richard M. Nixon announced that he would “suspend temporarily the convertibility of the dollar into gold or other reserve assets.” There was never a going-back. This event put an end to the Gold Standard and started the Fiat-Money Standard.

Fiat money is money issued by a country’s central bank not backed by any physical commodity and whose value is derived from the relationship between supply and demand and the stability of the issuing government.

Fast forward to 2020

These days, to create money, the Federal Reserve buys government bonds and other securities, which are basically an agreement to pay money in the future(like a debt), from the government and print money left, right and all around(Quantitative Easing). Out of its 200 year existence, of the total value of USD in circulation, about 20% was printed in 2020 alone! This printing money against debt securities raises the National Debt of the Governments which then end up being paid out of the tax payers’ money. It took more than 200 years, from 1776 – 2008, to attain $1Trillion in debt. By 2014, in a span of 6 years, it added about another $3 trillion. However, during the pandemic, $3Trillion was produced in 3 months alone, which calculates to about $23million per minute!

Also, producing Trillions of money without backing any physical commodities doesn’t contribute to the real economy as there is no investment made in the place of new notes issued. This is generated by the Central Banks and goes into the banking system, from where it ends up in the hands of big businesses and hedge funds, thus widening the gap between the rich and poor.

The ease of producing money is clear from the following excerpt from Federal Reserve’s Chairman Jerome Powell’s interview with Scott Pelley, a correspondent for the CBS News magazine 60 Minutes: –

Scott Pelley: Fair to say you simply flooded the system with money?
Jerome Powell: Yes. We did. That's another way to think about it. We did
Scott Pelley: Where does it come from? Do you just print it?
Jerome Powell: We print it digitally. So we-- you know, we-- as a central bank, we have the ability to create money digitally and we do that by buying Treasury Bills or bonds or other government guaranteed securities and that actually increases the money supply. We also print actual currency and we distribute that through the Federal Reserve banks.

The Probable Future

The above mentioned concerns has led people to look into other forms of currencies and investment avenues. One such capable contender to the USD would be Bitcoin. It has higher stock-to-flow ratio, is hard and not controlled by any government. Nevertheless, the confidence in bitcoin has risen over the last year. Its value has increased from around $7,000 in January 2020 to $20,000 in mid December to $33,000 on January 2 2021. Is this the future of money? Only time will tell!

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Shreesha S
Shreesha writes about Business, Finance and Tech for The Snippets Journal. He is also the Founder and Head of Content Development.
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