Also, the gold standard was based on trust too. You trusted that the government would honour your request to exchange dollars for gold. There was nothing magical about being on the gold standard.
Money is just IOUs created by the government. The government uses them to pay for goods and services it wants. If the government wants someone to guard a building, they pay in IOUs. Then, every year, the government taxes everybody in the country and demands that they return a certain number of government IOUs to the country. It’s this obligation to pay taxes that gives their IOUs their value.
The person who was paid to guard a building is left holding a pile of IOUs. Fundamentally, they’re worthless. But, there are other people in the country who have to pay taxes and aren’t doing jobs for the government. So, the guy with the IOUs goes to the farmer and says “I know you’re going to need to pay taxes and don’t have any IOUs, I’ll trade you some of my IOUs for some of your vegetables”. After that exchange the farmer has enough IOUs to pay the government at tax time, and the guard still has enough to pay his own taxes.
Also, the gold standard was based on trust too. You trusted that the government would honour your request to exchange dollars for gold.
You also trusted that the supply of gold would not suddenly increase and devalue gold as a commodity. Or that demand for the specie doesn’t collapse because… let’s say, hypothetically, the world’s largest economy stops keeping it as a reserve currency.
The former happened in the second half of the 16th century, in an event known as the Price Revolution.
The latter was part of the Nixon Shock, following the unilateral cancellation of the direct international convertibility of the United States dollar to gold.
Incidentally, Nixon exiting the Gold Standard could more rightly be pinned on Charles DeGaulle.
In February 1965, French president Charles de Gaulle announced his intention to redeem U.S. dollar reserves for gold at the official exchange rate. By 1966, non-U.S. central banks held $14 billion in U.S. dollars, while the United States had only $13.2 billion in gold reserves, of which only $3.2 billion was available to cover foreign holdings.
In March 1968, the London Gold Pool collapsed.
In May 1971, West Germany left the Bretton Woods system, unwilling to sell further Deutschmarks for U.S. dollars.[10] In the following three months, the U.S. dollar dropped 7.5% against the Deutschmark, and other nations began to demand redemption of their U.S. dollars for gold.[10] On August 5, 1971, the United States Congress released a report recommending devaluation of the dollar in an effort to protect their currency against “foreign price-gougers”.[10] Also in August, French president Georges Pompidou sent a battleship to New York City to retrieve French gold deposits.[11] On August 9, 1971, as the dollar dropped in value against European currencies, Switzerland left the Bretton Woods system.[10] Pressure intensified on the United States to leave the Bretton Woods system. On August 11, Britain requested $3 billion in gold be moved from Fort Knox to the Federal Reserve in New York.[11] As Paul Volcker, then Undersecretary of the United States Department of the Treasury for Monetary Affairs, later put it:
Also, the gold standard was based on trust too. You trusted that the government would honour your request to exchange dollars for gold. There was nothing magical about being on the gold standard.
Money is just IOUs created by the government. The government uses them to pay for goods and services it wants. If the government wants someone to guard a building, they pay in IOUs. Then, every year, the government taxes everybody in the country and demands that they return a certain number of government IOUs to the country. It’s this obligation to pay taxes that gives their IOUs their value.
The person who was paid to guard a building is left holding a pile of IOUs. Fundamentally, they’re worthless. But, there are other people in the country who have to pay taxes and aren’t doing jobs for the government. So, the guy with the IOUs goes to the farmer and says “I know you’re going to need to pay taxes and don’t have any IOUs, I’ll trade you some of my IOUs for some of your vegetables”. After that exchange the farmer has enough IOUs to pay the government at tax time, and the guard still has enough to pay his own taxes.
You also trusted that the supply of gold would not suddenly increase and devalue gold as a commodity. Or that demand for the specie doesn’t collapse because… let’s say, hypothetically, the world’s largest economy stops keeping it as a reserve currency.
The former happened in the second half of the 16th century, in an event known as the Price Revolution.
The latter was part of the Nixon Shock, following the unilateral cancellation of the direct international convertibility of the United States dollar to gold.
Incidentally, Nixon exiting the Gold Standard could more rightly be pinned on Charles DeGaulle.