Gold Standard

We’re in the era of fiat currency. Every dollar’s value is guaranteed by government command. There’s nothing ensuring $1 is worth any physical good. Half a century ago, every US dollar in existence was valued by the price of gold. The Gold Standard, officially absolved in 1971 by Richard Nixon, allowed for an incredible expansion of the monetary base, huge economic growth and probably enabled Bitcoin too.

A little history lesson, in the past, every dollar was worth an equivalent amount of gold. The price of gold was fixed and the dollar value was derived from this point. If gold was $1000, a dollar would be worth 1/1000th of an ounce. Why? Trusting imperfect humans with governing the supply of money was too great a risk. While this may have been true, it also stifled growth. The supply of money was dictated by the supply of gold. As economies grew, a different monetary system was needed. 

The end of the gold standard allowed for incredible economic growth based on almost unlimited money creation. In the last 50 years, US GDP is up almost 20x. Banks could now issue money at unprecedented rates. Since the start of 2020, the US money supply has increased by 35%.

Not everyone agrees with this practice mainly because of the link between the money supply and inflation. One of the selling points of so many cryptos is their fixed supply including Bitcoin. A lot of current economic chatter pegs inflation as some evil phenomenon robbing people of their purchasing power.

Hyperinflation is exactly that but moderate inflation is good and necessary. Banks target 2-3% inflation every year; it keeps the economy moving and allows wages to rise. Moreover, it works against deflation, a crippling economic state where falling prices prevent growth.

Either way, this is just a little history lesson on our current monetary system.