What is the US Dollar Worth? – Fiat Currency & a History of The Gold Standard
The US Constitution established the right of the Federal Government “to coin Money, regulate the value thereof,” and so in 1792, they did so by establishing the value of a dollar at roughly 1/20th of an ounce of Gold. So $20.67 bought one ounce of gold. Today it takes over $1000 to buy an ounce of gold. That’s called inflation. If your great, great, great, great, great grandfather had traded in his ounce of gold for $20 and passed it down through the years, your family would have lost out considerably because your $20 should be worth over $1000.
On the other hand, if he had earned $20 and traded it in for an ounce of gold and passed that down to you, you would now have something worth more than $1000. It was the same value back then, but today it means the difference between $20 and $1000. So how did this huge distortion happen? Let’s take a look.
There was actually no inflation vs the price of gold for the next 96 years.
However, in 1913 the Federal Reserve was created, which then began a government manipulation of the economy. In fact, in 1933, FDR confiscated all of American’s gold! Soon after, in January of 1934 , they decided to manually induce massive inflation. He changed the value of the US Dollar from $20 an ounce to $35 an ounce. He immediately made every dollar that every American (or anyone else) owned worth about half what it had been before. Think about that: the government mandated that everything you had ever earned was worth half what it had been when you put in your hard work to earn it. And they did this on purpose!
The stated value stayed the same for another 37 years even though the US Government had been printing more dollars than they had to back up. Charles de Gaulle of France saw that the dollars France earned from selling the US goods were not really worth the gold that they claimed to be, so he demanded the gold that the dollar supposedly stood for. He and others began draining the US Treasury because he was right, the dollar really wasn’t backed with the gold it claimed to be. The government had been playing free and easy with it’s books and printing more money than it had gold to back up.
President Nixon inherited this problem – a can kicked down the road for decades – and saw that it was a really serious problem. He could have chosen (just as all those before him could have) to make the tough decision and implement prudent financial management. Of course, these sorts of hard decisions are always difficult whether they be personal or nationwide and make re-election more difficult. He instead decided to simply leave the gold standard altogether. He told the nation that this would be good for us and was simply a reaction to evil financial manipulation of outsiders. Of course the truth was the financial manipulation was not evil. It was simply an understanding that the dollars people earned were not what the US said they were and that these dollars were turned in for the gold that the US claimed they were worth. If you lie, and someone calls you on it, are they evil? Greedy? Yet this was the politician’s response. I really don’t want to castigate President Nixon, because our current governors are doing the exact same thing. It’s easy to place blame on evil greedy outsiders, but they would have no room to do what they do if our government made wise prudent decisions.
Since then, the Dollar has floated freely. Another word for floated might be “dropped” freely like a rock. Within the year that Nixon took the Dollar off the gold standard, it moved from $35 all the way to $195/ounce. This had been the true hidden value of the dollar. (Perhaps not, markets often overreact to news so there’s a good chance it extended beyond true value.) So in that one year alone the Dollar became worth one sixth of what it had been before. In the years since that already great run up, it has become worth one sixth what it was after that initial inflation.
To this day, the Dollar cannot be turned into the government for anything. It is simply worth whatever you can get for it. This is a value that changes daily. You notice this when you’re in a foreign country and exchange dollars for the local currency, but it’s more difficult to notice here. However, everything you buy is affected by this reality – whether you see it or not. If you buy a foreign product, it will cost you more. Sometimes this is hard to see immediately, because the store you are buying from or even the foreign company who sells to them may take a lower profit for a time. But eventually you will see this effect.
Everyone buys foreign goods in our global economy. But this isn’t only about foreign goods. Everything in the economy has the price of many other products built into it. The most obvious and prevalent of these is oil. Everything runs on oil. Everything that gets brought to the store that you bought a product from got there by oil. When the dollar drops, the cost of oil goes up and that gets built into the cost of the goods you buy. Again, this change is not seen immediately, day to day, but it is there, and you will see it. When the profit that the maker of the product you buy dries up because his costs have gone up, he will raise his price to you. He will not stay in business operating at a loss. This is inflation.
While the government talks about “taxing the rich” as some righteous activity, they are silently destroying the value of the dollars that every single person in this country holds. This allows them to say that the economy is “growing” as well as making it possible to pay off the massive debt that can otherwise never be paid off. This is the most severe tax going on today, but we’ll get more into that tomorrow.
One final word on this. Since August of 2008, the monetary base of our US Dollar system (printed coins, bills, and central bank reserves) has grown from $800 Billion to $1.7 Trillion. If they’ve increased the amount of dollars by double, would it be fair to say that the value has dropped in half? We’ve seen the value of the Dollar drop 15% so far this year – a massive drop for such a large currency.
You’re invited to a free event November 18th in Austin to discuss these things in greater detail. If you would like more ideas on how to prepare for this coming storm, please sign up for our free newsletter here. If you’d like to read more about the spiritual realities behind what’s happening, read the series we just finished on Daniel.
This post is Part 4 in the series Financial Outlook of the United States. To continue with this series, click on Pt 5. To gain more insight, you can read about the coming storm here, in Pt 1, Pt 2 and Pt 3.
Photo credit: fpsurgeon