The End of the Gold Standard: When Money Lost Its Metal Backing

For most of human history, money meant metal. Gold coins. Silver coins. Paper notes that you could walk into a bank and trade for actual gold. Then in 1971, a US president went on television and changed everything. Money became just paper. Backed by nothing but trust.

Chapter 10 of “From Tulips to Bitcoins” by Torsten Dennin covers the end of the gold standard. It is one of the most important financial events of the 20th century. And most people have no idea it happened.

Gold Was the System

For centuries, gold was how countries ran their money. Your country has X tons of gold, your country can print X amount of currency. Simple. Honest. Limited.

The gold standard was the dominant monetary system all the way up until World War I. Silver actually came first. For a long time, most countries ran a bimetallic standard. Both gold and silver were money. In the US, the official ratio was 1 ounce of gold to 16 ounces of silver. France preferred silver. Britain pushed gold.

Then gold discoveries in California and Australia in the mid-1800s made gold cheaper and more available. Suddenly a pure gold standard looked more practical. Germany switched to a gold standard in 1871. Others followed. Britain won the argument over France. Gold became king.

Depression, War, and Cracks in the System

The Great Depression of 1929 and the banking crisis of 1931 put the gold standard under serious pressure. Countries needed to print money to fight economic collapse. But you cannot print money freely when every dollar has to be backed by gold sitting in a vault.

Britain cracked first. In 1931, they suspended the pound sterling’s convertibility to gold.

Then FDR did something most Americans today do not know about. In 1933, he declared private gold ownership illegal. Not just regulated. Illegal. Punishable by up to 10 years in prison. Every American had to hand over their gold to the Federal Reserve at a fixed price of $20.67 per ounce. The government took all the gold. This ban lasted until 1975, when Gerald Ford finally reversed it. Over 40 years of ordinary citizens not being allowed to own gold in the “land of the free.”

Bretton Woods: The Dollar Becomes King

After World War II, the Allied countries met in Bretton Woods, New Hampshire and built a new system. The US dollar would become the global reserve currency. Every central bank could exchange their dollars for gold at a fixed rate of $35 per ounce. Other currencies would peg to the dollar. The dollar would peg to gold.

This worked well for a while. The US had most of the world’s gold. The economy was booming. Everyone trusted the system.

But trust is fragile.

The Money Ran Out

Starting in the 1960s, the US started spending more than it had. Vietnam War costs. Expanding welfare programs. Trade deficits growing year after year. The gold reserves in Fort Knox kept shrinking while the government kept printing dollars.

By 1970, something dangerous happened. The US money supply exceeded US gold reserves for the first time. There were more dollars in the world than gold to back them. The math did not work anymore. Foreign governments noticed. France in particular started demanding gold for their dollars. They could see the gap between what the US promised and what the US actually had.

On August 15, 1971, President Nixon went on television and announced that the US would stop converting dollars to gold. Just like that. No more gold window. The “Nixon Shock” they called it. By 1973, the Bretton Woods system was officially dead. Floating exchange rates replaced it. Money was no longer tied to anything physical.

What Replaced Gold

What backs the dollar today? Nothing tangible. Government promises. The “full faith and credit” of the United States. That is it.

Dennin lays out the numbers and they are uncomfortable. Global debt has accelerated to over $320 trillion. Global GDP is only about $80 trillion. That is a 4-to-1 ratio. The dollar’s purchasing power has declined over 90% since 1971. A dollar in 1971 buys less than a dime’s worth of goods today.

Central banks and the IMF still hold about 33,000 metric tons of gold. That is roughly 20% of all above-ground gold stocks. They tell us gold is not money anymore. But they keep holding it. Make of that what you will.

The Return to Metal (and Code)

By 2011, something interesting was happening. The US Mint reported a 30% increase in silver coin sales. Utah was seriously considering accepting gold and silver as legal currency again. Several other US states had similar proposals. People were quietly moving back toward precious metals.

And then Bitcoin showed up. A digital currency with a fixed supply. No central bank. No government printing more of it. In many ways, Bitcoin is an attempt to solve the same problem gold solved for centuries. How do you have money that a government cannot just create more of whenever it wants?

Gold-backed cryptocurrencies emerged too. Trying to combine the old trust in metal with the new trust in code.

What I Think About This

This chapter connects the dots between earlier chapters in Dennin’s book and where we are now. The California Gold Rush from Chapter 3. The oil money from Chapter 5. All of these commodity stories were happening in a world where money had a physical anchor. That anchor is gone now.

The decision to end the gold standard was probably necessary at the time. You cannot fight a Cold War and fund a global military with gold-backed money. There is not enough gold. But the consequences are real. Every government can now print as much money as it wants. And they do. The $320 trillion global debt number is the proof.

I grew up in the USSR, where government money became worthless overnight. So I have a personal bias here. When someone tells me “trust the government with your money,” I get skeptical. The gold standard had problems. But at least it forced governments to be honest about what they could afford.

Whether the answer is gold, Bitcoin, or something else, the question Dennin raises is the right one. What should money actually be backed by?

Previous: Chapter 9: Russian Wheat

Next: Chapter 11: Oil Crisis 1970s

This is part of my From Tulips to Bitcoins book retelling series.