3 minute read
The end of the gold
oney, money, money. Everybody wants and uses money as they believe by Sophia Alessandra WaltersM
those colourful pieces of paper to be valuable. Essentially, that is how our current currency system, fiat money, works. Through this system, our Malaysian Ringgit is not of intrinsic value and is backed by a little faith from us, Malaysians. It is also accompanied by a reassuring pat on the back from the government and the central bank. On the contrary, the golden age of the Malacca Strait's trades involved the usage of currencies that had intrinsic value such as silver, copper, and gold coins. So, where did all that go? Or to be more precise, where did it go wrong? Let’s take a look at the journey of our currency; how we went from being backed by gold to being backed by the US dollar, to currently being backed by, well, faith.
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Fiat money: The emergence
To understand why we use fiat money in our economy is to understand why we abandoned the gold standard in the first place. Before diving any deeper, let’s get some facts straight. First of all, World War I and World War II caused the devaluation of currencies all around the world that was at the time directly tied to gold (the gold standard). Second of all, the United States of America (USA) had and still has the biggest gold reserve in the world. With countries in need of printing more money to rebuild their economy post-war, it was realised the gold standard system was not compatible. Hence, considering those previous factors, a 1944 summit was held in a town called Bretton Woods in New Hampshire, USA. It comprised 44 allied nations that decided upon an agreement called the Bretton Woods
Agreement.
* Bretton Woods, New Hampshire, USA
The Bretton Woods Agreement came up with a fixed currency exchange rate. This basically means, since the USA has the most gold reserves, the value of the US Dollar was fixed to gold ($35 per ounce) while the rest of the world’s currency had fixed exchange rates to the US Dollar. This enabled only the US Dollar to be converted into gold which gave the USA economic dominance. Another significance of this agreement is the establishment of the International Monetary Fund (IMF) and The World Bank. The IMF was tasked to maintain the international monetary systems and enforce the Bretton Woods agreement. The World Bank on the other hand was tasked to ensure economic development by loaning money. In simpler terms, they loaned out money so that countries are not required to print more money which consequently avoids the devaluation of their currency. However, there were multiple flaws in the system that caused it all to collapse. At the time, the USA was facing multiple political conflicts such as the Vietnam War which was one of the many economic problems that required major financial funding. This led to excessive printing of the US Dollar which ultimately devalued their currency against their limited supply of gold. As other countries started to catch on, they demanded gold in exchange for the US Dollars that they possessed as they slowly lost faith in the stability of the US Dollar. In this period of time, the USA was not only experiencing high inflation but a continuously decreasing amount of gold in their reserves. How can it get any worse? Hence, Richard Nixon, the then President of the USA announced to halt all exchange of US Dollars to gold. Just like that, the final nail was hammered into the coffin of the Bretton Woods Agreement and the gold standard system.
