End of the gold standard and Rise of Bitcoin
“We know nothing else that is so good at keeping value rather than gold. It’s quite incredible that the best ledger we have ever found is such a primitive thing, that takes billions of dollars to dig it out of the ground and then we lock it in vaults underground again.”
On April 5, 1933, President Franklin D. Roosevelt signed Executive Order 6102, titled “Requiring Delivery of All Gold Coin, Gold Bullion, and Gold Certificates.” Individuals and entities were required to turn in their gold holdings to the Federal Reserve in exchange for paper currency at the prevailing rate of $20.67 per ounce.
The Gold Reserve Act of 1934, also known as Public Law 73–87 or H.R. 6976, was signed into law on January 30, 1934, and it is sometimes referred to as Executive Order 6012. It increased the official price of gold to $35 per ounce devaluing the U.S. dollar in terms of gold, effectively creating a substantial increase in the value of the government’s gold holdings. The U.S. government aimed to stimulate the economy and stabilize the financial system by easing monetary constraints and expanding control over monetary policy during the Great Depression.
Executive Order 6102 marked the end of the gold standard for individuals. Confiscation applied specifically to gold and not to other forms of private property.
As part of this act, the government nullified the right of individuals to demand gold payment for their bonds issued under earlier contracts that promised payment in gold. This action by the U.S. government can be considered a default on gold bonds because it essentially changed the terms of the bond contracts, eliminating the option for bondholders to receive payment in gold.
“Gold was already defeated by the state. See Executive Order 6102. That’s why it’s not an effective hedge against inflation. Bitcoin is much harder to defeat in this way. It’s not certain that it will succeed, but unlike gold it is not certain that it will fail.” Balaji 2023
The Bretton Woods monetary system was established in July 1944, at the end of World War II. It promotes economic stability and facilitates international trade by setting rules and procedures for financial interactions among nations. The conference brought together delegates from 44 countries where members agreed to maintain the value of their currencies within a specified range against the U.S. dollar.
On March 18, 1968, President Johnson asked Congress to eliminate the gold cover requirement to counteract this gold drain, which mandated that a certain amount of gold had to back the US currency in circulation. At that time, the United States was experiencing a significant outflow of gold reserves due to its commitment to maintaining the value of the US dollar at $35 per ounce of gold under the Bretton Woods system. By repealing this requirement, the remaining $12 billion worth of gold held by the US Treasury could be used for international settlements and to support the US dollar’s stability in the foreign exchange markets. This measure aimed to provide more flexibility in managing the nation’s monetary policy.
In 1971, the United States made the decision to end the practice of redeeming U.S. dollars held by foreign governments for gold. This marked an important milestone in the collapse of the Bretton Woods system.
The U.S. faced economic challenges and increasing budget deficits in the 1960s, and the value of the U.S. dollar came under pressure. This led to concerns about the ability of the U.S. government to maintain the gold convertibility of the dollar at a fixed rate. In August 1971, President Richard Nixon announced the suspension of the convertibility of U.S. dollars into gold. The U.S. government sought to address the growing imbalance between the amount of U.S. dollars in circulation and the available gold reserves. Additionally, it aimed to gain more flexibility in implementing monetary and fiscal policies to address economic challenges at home.
“The gold standard has been destroyed chiefly because it was an obstacle to inflation.” Friedrich A. Hayek 1976
President Gerald Ford signed legislation that allowed for the private ownership of gold again in 1974.
Gold sold for $282.70 an ounce on the day Mr. Volcker took office. It reached $850 five months later, on Jan. 21, 1980. It took 28 years later during the financial crisis of 2008, to get back to sucking level.
