Remembering The Golden Years

In these trying times it's important to start branching off and learn more about the factors that affect us financially. Economics was a class that I glazed over and put the bare minimum of effort in order to pass. But now that the recession is over a year old and the number of unemployed Americans is in double digits, learning at least the economic essentials is a must. The first issue I decided to learn about was the gold standard. I use the past tense because Richard Nixon discarded the standard on August 15, 1971.

Before we go back in time and understand the history involved, let's get the concept of the gold standard down. It is defined as, "A commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price." Basically, the gold standard was embraced in an effort create an even playing field across all national economies.

Historically, the United States used a variety of precious metals upon which it based its currency. The two most prominent have been gold and silver. Bimetallicism -- as it's known -- was enacted by Congress via the Standard Act. Now it's important to also know that whenever there is a recession or depression, governments hate having such a shiny standard. What they like doing in such dire times is print more money giving the immediate illusion that markets are holding fast and steady. They don't like having to worry about a standard to uphold because that only slows the printing presses. But that's not how it works.

This tactic of printing more money is a favorite of central banks worldwide. When one powerful economy, like that of the United States, begins to print more money, so too, in most cases, do the banks of foreign nations. This had and still has -- a tremendous effect on the Forex (or Foreign Currency) markets. To keep parity with the dollar, they must print more or less money.

Since 1971, every major currency worldwide has become a fiat currency, that is, it has no intrinsic value. It is only as valued as it is accepted for goods and services. The hidden danger involved is in the inflation that arbitrary printing causes. It has been estimated that the buying power of a 1971 dollar is now roughly eight cents to the dollar. Without a peg to the dollar, the Fed can print as much as it wants, thereby causing a massive tide of inflation that has the potential to flood our everyday lives.