Why Gold and Silver Backed Up Our Currency

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Mr. Beat examines why we used to back up our currency with gold and silver, and why we don't today.

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Sources/additional reading:
https://www.econlib.org/library/Enc/GoldStandard
https://www.cnbc.com/2020/04/29/why-the-us-dollar-is-still-considered-such-a-safe-currency.html#:~:text=%22The%20dollar%20is%20strong%20because,in%20circulation%20around%20the%20world.
https://www.forbes.com/sites/investopedia/2014/04/21/everything-you-ever-wanted-to-know-about-the-gold-standard/#212dcbe12716
https://en.wikipedia.org/wiki/United_States_dollar
https://en.wikipedia.org/wiki/International_use_of_the_U.S._dollar
https://www.mentalfloss.com/article/12715/why-did-us-abandon-gold-standard

Currently the United States dollar, the official currency of the United States since 1792, is worth something because nearly everyone in the world believes it to be worth something. It’s true, if everyone decided they didn’t like it as a form of payment, then it wouldn’t be valuable at all.

But because the United States has such a strong economy and it has for a long time, people around the world still believe in it. Yep, even during these somewhat chaotic times, most around the world consider the United States stable, both economically and politically. It’s true.
Most global central banks hold U.S. dollars in reserves, and traders use it as the standard unit of currency in international markets for commodities like petroleum and gold.

Up until 1971, gold used to back up this. In other words, the value of the U.S. dollar used to be linked directly with gold. They called it the gold standard, and it wasn’t just the United States that used it. Countries converted paper money into a fixed amount of gold while also setting a fixed price for gold. That fixed price would determine the value of the currency. So, for example, if the United States set the price of gold at $1,000 an ounce, the value of the dollar would be 1/1,000th of an ounce of gold.

So why did countries do this? What were the benefits of the gold standard? Three big reasons why countries used it was
1) to supposedly bring price stability to markets
2) to provide a fixed international exchange rate for trading
3) and to combat risky monetary behavior by governments that spend money they don’t have and therefore cause too much inflation.
Basically, the gold standard prevented debt and deficits from getting out of control and helped reduce the size of government.

So why gold and silver? I mean, sure they’re pretty, but why have gold and silver been so valuable historically?

Well, both silver and gold are rare enough that it’s like “woah” when you have them, but common enough that you could turn them into coins. Both have a fairly low melting point to turn into coins, and as coins, they were durable, easy to get around, and held value for a very, very long time. Even during tough times, gold and silver have value. Not only that, but you can make highly desirable stuff out of them. Humans have been emotionally connected to (silver and gold) like few other items. Now, gold always wins out over silver since silver tarnishes over time and it’s more rare.

So that’s why folks used silver and gold as currency. Over time, though, they were both just TOO rare to make a practical currency anymore, and so governments just began LINKING their currencies to them.

For example, in 1704, the British West Indies began linking its currency to the Spanish gold doubloon.

However, there was also this thing called bimetallism, in which governments linked BOTH gold and silver to their currencies, and at a fixed ratio to each other. Sooo, back to the United States.

#history #goldstandard #economics

Видео Why Gold and Silver Backed Up Our Currency канала Mr. Beat