In this final part of this series, we talk about the rise and fall of the Bretton Woods system leading up to today’s debt-based system.

In 1946, after the end of World War 2, the world came to use what was known as the Bretton Woods system. In this system, the dollar was pegged to gold at US$35 per Troy Ounce. And the rest of the world pegged their currencies to the dollar.

This system sounded feasible at the start as the United States was a major holder of gold. However, as time went by, consistent balance-of-payments deficits eroded their gold holdings as well as the peoples’ confidence in the dollar’s convertibility to gold.

1971 saw the President of the United States formally cease the free convertibility of dollars into gold. The going rate of gold was also changed to US$38 per Troy Ounce.

Things continued to slide until 1976 when the last bastion of the gold standard finally threw in the towel. Gold was now free from the shackles of any fiat currency.

With nothing to hold countries back from printing more fiat currency, many countries started printing more money to reduce their debt burden only to face hyperinflation, which wiped out their middle class. However, gold’s steady appreciation against the dollar ensured that those smarter ones in these countries who had the foresight to be holding gold were able to restart their lives if they chose to flee elsewhere.

With the current crises in the world, more central banks are stocking up on gold to boost their reserves, and in turn the confidence in their currencies. The world has seen many examples of what happens when countries do not have gold reserves to bolster their finances. Just as The Central banks have learnt from history, so should we as individuals.

Sources: britannica.com, econlib.org, focus-economics.com#goldstandard#gold#brettonwoods#goldhistory