Money as we know it today is not backed up by anything more than governmental promises. For centuries commerce relied upon gold and silver to act as a medium of exchange.

Historically, during times of war, nations would take their money off the gold standard and inflate the money supply in order to finance the expenses of war. After the war was finished the money would go back unto a gold standard. This did not occur after WWII.

The U.S. emerged from WWII as having the strongest economy of the world. In 1945, the U.S. produced half of the world's coal, more than half of the electricity, and two-thirds of the coal, it held a majority of investment capital, manufacturing production and exports, over 65% of the world's total gold reserves, and was the sole possessor of the atomic bomb.

The Bretton-Woods conference established, among many things, a new relationship between gold and paper money. As the prominent world power, the currency of the U.S. would become the reserve currency of the world and was itself redeemable in gold to the arbitrary amount of $35/ounce. Important commodities such as oil would be traded for in U.S. dollars.

As time progressed and the welfare/warfare state of the U.S. grew the need for additional money was accomplished by the simple printing of money. Consequently, foreign nations began to value gold more than the dollar due to the fundamentals of supply and demand. Instead of taking dollars they demanded gold and the gold reserve of the U.S. began to dwindle.

Things came to a head in 1971 when it was observed that the U.S. would shortly run out of gold if the trend continued. On August 15, 1971, president Nixon unilaterally "closed the gold window," making the dollar inconvertible to gold directly, except on the open market. This effectively severed any last remnant of paper money being backed up by gold.

All currencies were said to "float" against one another from this time onward. I have read one acute economist's observation that they do not in fact "float" but instead fall at different rates.

As of March of this year the US government ceased to publish the M3 money supply figures. They begin with 288.8 billion in January 1959 to the last reported figure of 10,298.7 billion in February, 2006. This represents over a 35-fold increase of the money supply, of which more than half has been since 1996. This latest surge in the money supply was what fueled the stratospheric valuations of the technology stocks of the 'new economy' under the Clinton administration and the current housing bubble under president Bush.

Gold, unlike paper money, has a finite supply. It has economic value. Paper money, like Voltaire said, is intrinsically worthless. Many paper currencies have failed altogether, and the two most successful currencies the world has ever known, that being the British pound and the American dollar, have both seen their purchasing power erode over 95% over the last century.

Published on http://DollarDaze.org - May 19, 2006.

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© 2006 DollarDaze

ABOUT THE AUTHOR

Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at mikehewitt@hotmail.com.

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A Brief History of Money by Mike Hewitt

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