Matt Chuen

3rd January 2019

When the Dollar Crashes, the Gold Standard Will Emerge

All currencies used to be backed by the value of gold – the Gold Standard. Then, economic mechanisms developed over time to a point where a handful of people had the means to conjure trillions of dollars, euro, renminbi, and pounds out of thin air.

For example, in the 1971, brutal Ugandan dictator Idi Amin raised military spending by 500%, which spiked inflation 700%. When an ex-finance minister warned that Uganda was headed towards bankruptcy because of bloated military spending, Amins answer was “Print more money.”

Idi Amin, brutal Ugandan dictator from the 1970s
Fiat trickery was openly flaunted in the 1970s by Ugandan strongman Idi Amin

Amin doubled the money supply between 1976 and 1978. On the ground, gasoline cost $39 per gallon and sugar $5 a pound, with the monthly minimum wage set at $30. What was once the dastardly action of a brutal African dictator is now mainstream.

In the United States, Federal governments issue debt to pay for their expenses, and then print more dollars to pay off trillions of debts.

Debt is at the heart of the scheme:

In the US, banking systems were deregulated during former President Bill Clinton’s term in the 1990s, which heightened debt’s influence over the country’s economy. Since then, European vassals followed on through the early 2000s.

The money printing fiat currency scam
In the 1990s, Bill Clinton paved the way for a debt-driven money printing scheme

Such deregulation has also given more power to banks by simply handing out more debts to governments, companies, and individuals. As a result, around 97% of all the money circulating in the West comes from banks through debts and loans. With that said, it is important to note that banks make a huge portion of their profit from interests that are generated from loans. This means that banks are basically earning and generating more cash that does not offer real value to the economy.

Now, as large amounts of this money are in circulation, one could easily see a chaotic problem when banks would start recalling outstanding liabilities or debts.

As history shows, this economic collapse timeline has begun building up since the end of World War II, reached its peak during subprime manufacturing crisis from 2007-2009, and was expected to cause a global economic crisis that could collapse around 2016 or 2017.

Laughing politicians with poor Africans
Financial crashes historically benefit the elite at the expense of the common folk

Such an event could have left a huge economic impact on a global scale, causing poverty, famine, and even death among many populations. The ruling elite class, on the other hand, would still remain on top, pushing to begin the monetary cycle again from square one.

Now, allowing wealthy people to be in control of everything and keeping the public uninformed can cause the cycle to repeat continuously.

Why Money Has Value

Money can maintain its essential functions only if people have a high level of trust in the monetary unit they are using as a stable store of value. In the event that this trust is lost, the people would give up using the monetary unit, either suddenly or gradually, in favor of something else.

Based on historical records, “bad” money would drive “good” money out of circulation, especially when faith in its stability is lost. Though it might still be used in most transactions, especially when it is the mandated legal tender, it will no longer be trusted as a store of value.

In this case, people will then hoard the “good” money as the superior store of value until the “bad” money is finally totally abandoned. Then, a return to using the “good” money entirely becomes possible.

Take a look at this:

People are now using traditional money. Then, cryptocurrencies backed by gold are rising in popularity. Jumping on the bandwagon, some people are then investing in gold coins and using cryptocurrencies for their online transactions.

While it does not seem that cryptocurrencies will entirely replace the traditional money that we are using today, time might come that they will.

This monetary cycle, which is good-bad-good, has been happening throughout history.

What Is the Gold Standard?

Gold standard
Gold exchanges typically hold standard bullion coins and bars of fixed weight and purity.

The Gold Standard is a system where nominal exchange rates between participating countries are fixed with the value of gold. So, if a gold ounce is valued at 20 US dollars and 10 British pounds, then 2 US dollars should be exchanged for 1 British pound, as a fixed exchange rate.

Under the Bretton Woods system, the US was supposedly following a gold standard in implementing its monetary policy, while the rest of the world set their exchange rates in US dollars. While it was impossible for the ordinary people to redeem their US dollars or other money into gold, the central banks can do it, theoretically speaking.

Also, countries can participate in the Gold Standard for a time, leave it, and return it, just as it is possible for them to fix their exchange rates against other currencies.

Take what Hong Kong did with the US dollar, for example:

Like what other emerging market countries did during the 1990s and 2000s, the country had fixed exchange rates with the US dollar, but then left it during the Asian financial crisis.

The fixed exchange rate economic system implies that governments do not have the power to completely set domestic interest rates. This is what is known as the “impossible trinity” in economics. With such, one cannot have free capital movement between the country and other countries, fixed foreign exchange rates, and independent monetary policies at the same time.

During the Gold Standard era, which covers the early 20th century, this type of system meant that monetary policies were set according to international capital and trade flows. It also entailed that during a crisis where a country is having a capital flight or a current account deficit where the central bank is not also able to cut interest rates to fight the crisis, interest rates are forcibly raised to fight the capital flight, worsening the recession.

However, this was not an issue among the developed countries in the early 20th century. But when active monetary policies were needed, there were great incentives to leave the Gold Standard.

This happened during World War I:

The costs of war were huge and could not be financed solely by the command economy and debt issuance. As a result, some seigniorage, where governments issue currencies, happened. This was serious in many countries, especially in Russia as it led to inflation. For other countries, it increased their debts more because of more developed economies, such as the UK and France. As it could not be reconciled with the Gold Standard, a passive monetary policy was needed, though it is not an active one.

Then comes the Bretton Woods dollar-gold system, where the US dollar was convertible into gold and the rest of the world pegged their currencies to the US currency. Now, countries were able to periodically adjust that peg to gain a comparative advantage, helping with their exports. The system was especially helpful to European countries to help in their recovery from the devastation of World War II. The system worked and was relatively stable from 1945 to about 1965.

Bretton Woods summit of 1944
Signing Of the disastrous Bretton Woods Agreements in 1944

What became the ultimate doom of the Bretton Woods system was the growing lack of faith in the willingness of the US to actually convert their dollars into gold, which resulted in large government deficits under the leadership of President Lyndon B. Johnson. He paid for both the mounting costs of Vietnam and his Great Society initiatives.

In a monetary system that is backed by gold, government deficits must be paid for by also borrowing such precious metal. Obviously, it was expensive. And, as deficits grew, the world gradually lost faith that the country was actually willing to pay for everything with gold. Unlike switching to a non-gold based dollar, inflation would just eat away the real debt burden, which is politically more flexible and practically much cheaper.

This loss of faith further grew as the market price of gold diverged from the official US conversion rate. Hypothetically, a country would be able to convert its dollars into gold and then sell the gold for dollars, making a profit in the process.

However, all fixed-rate commodity-backed systems would be put in danger with such a divergence taking place. And, as international trade grew during the post-war period, tensions between the market rates and fixed conversion rates also grew.

So, as the willingness to convert dollars into gold grew, other central banks eventually showed interest in converting their US dollar holdings into physical gold before America’s stock of gold depleted. The first country to request such a conversion was France, but other countries were privately showing the same interest.

Like any other bank, central banks are obliged not to lose money. Considering the situation, they were considered to be only acting in their best interests.

When France officially requested such a conversion, it signalled a clear sign that the dollar-gold standard will fail. So, President Richard Nixon, under his leadership, made one of the most shocking economic measures taken by the US government in history—the unilateral cancellation of direct international convertibility of the US dollar to gold.

The decision was based on the notion that there would have been no point in converting dollars into gold for France, as all other dollar holders would have followed. As a result, the US would have shipped all of its gold to other countries, which would also end up the country suspending such conversion anyway.

As a result, it was scrapped.

Why did America abandon the gold standard?

In the early 1930s, the US government faced a huge problem of the Great Depression where they were left with little influence over the economy, resulting in large rates of unemployment and severe deflation. This pushed the US and other government entities to raise interest rates to prevent draining the gold reserve, as it could dissuade people from cashing in their deposits.

Problem is, such move made it more difficult for people and businesses to borrow cash. To solve such dilemma, President Franklin D. Roosevelt detached dollars from the value of gold, thus helping the government to release more money into the economy with favorable interest rates.

On March 3, 1933, the President closed the banks for 10 days. When they were reopened, all of the gold has been turned in to the Federal Reserve. This kept people from redeeming their dollars for gold.

A month and 2 days after the banks were closed, all Americans were ordered by the President to turn in their gold certificates and coins and have them exchanged for paper currency. Gold bullions, coins, and certificates were given a set price of $20.67 per ounce, and they must be all returned by May 1, 1933.

9 days later, the gold reserves at Fort Knox were created through the $300 million in gold coins and $470 million in gold certificates that were delivered to the Federal Reserve. According to the author of “Lords of Finance” book Liaquat Ahamed, “Most economists nowadays agree that the separation from gold makes around 90% of the reasons for US’ success out of the Great Depression.” Until 1971, USA allowed other countries’ government entities to exchange dollars for gold.

However, President Richard Nixon stopped such practices to prevent foreigners from digging through the American gold reserve.

Gold’s set price increased to $35 per ounce in 1934 and continued until 1971.

Richard Nixon killing the gold standard in 1971
Nixon signing the end of the gold standard in 1971

On August 15, 1971, President Nixon announced that the US will no longer convert dollars to gold, fixed price or not. This marked the end of the gold standard.

It wasn’t until 1974 when Americans are allowed to own gold bullion again after President Ford signed the legislation.

Despite the US abandoning the gold standard, gold remains an asset value, helping protect investor’s assets.

Benefits of a gold standard

The events mentioned earlier have turned the dollar into pure fiat money, or cash without any valuable assets backing it. Thing is, the history has tons of examples that prove fiat money almost always turns back to its base value of zero. Like the Denarius of Ancient Rome, for instance, in 50 A.D. denarius coins were made of pure silver. Nonetheless, Roman emperors have reduced the silver content of denarius through time, until it only contains around 0.05% of the precious metal. After the collapse of Rome, the low value of denarius coins made them unacceptable for various goods and services, thus making them basically worthless. It also happened to the old currencies of China, France, Germany and other countries throughout history. The symptoms of fiat money losing its value is already observed with dollars as well. This posed a serious threat towards dollar and other currencies pegging on it that couldn’t be ignored. This is where investing in gold coins comes as an important consideration.

With a gold standard:

  • A money’s value is backed by a fixed asset
  • Provides the economy with a stabilising and self-regulating effect
  • Money can be printed as much as the same amount of gold that the government has
  • Discourages inflation, debt, and government budget deficits
  • More productive nations earn more gold when they export, for example, and boost investments and reserves

Unfortunately, countries without any or has little supply of gold are at a competitive disadvantage. But even those that do like America may not want to return to a gold standard because of its negative impact on the economy.

For instance, the US government will no longer have the complete freedom to manage the economy, constricting its ability to do so. In times of inflation, the Fed can’t reduce the supply of money by raising interest rates.

But gold is in debate again.

The coming gold standard

Gold standard applied using blockchain banking
The emerging gold standard will be a seamless transition away from fiat

There are many available write-ups talking about the rise of gold value, and how it would continue through the years. It’s even expected to go beyond the value of fiat currency units, as the latter loses its perceived value.

Such observable factors could tell a lot about the new gold standard coming later on, which people definitely need to prepare for. This is especially true that such monetary system significantly varies from the current fiat currencies the world commonly has.

The gold standard will not merely change the physical money, but will also affect finance on a large scale, which includes banking and businesses. It could be largely beneficial for some countries, industries, and markets, but could severely harm others as well.

From there, one could see that asset allocations and investment strategies must be modified to fit in the new system, such as new methods of investing in gold coins.

But it’s only a matter of time before a new global gold standard will arrive. Everyone should brace for a possible rough transition and their stars if things happen smoothly.

Investors and businesses best prepare for the coming of the gold standard, finding ways to protect their wealth and to flourish through the new monetary system. Because failure to prepare could result in assets lost and generation of hard work down the drain.

There’s a huge risk accompanying the arrival of the new gold standard, and it would leave people with no choice than to throw zero-value fiat currencies as a thing of the past.

It would be best for people to do practical preparations to survive the transition and through the new monetary system, especially because the public couldn’t rely much on government entities for help. After all, government officials will probably dilute the system for their advantage, instead of providing sufficient assistance for the people in their countries.

Big business using blockchain

Tracing back, the original Bitcoin paper was published by Satoshi Nakamoto in 2008, and it took around a year for the first Bitcoin to be made. Subsequently, it took more years for the technology community to conceptualise the blockchain system, much more its actual completion.

Nonetheless, Bitcoin and its related concepts broke out after media organisations like Newsweek and New York Times made their investigative reports in early 2014 about the huge potentials of the said cryptocurrency.

In just a year, the largest central banks all over the world, (which includes the Bank of England), began their research and published papers on the potentials of blockchain technology. But the paper is focused more on the system that runs the Bitcoin, instead of highlighting the crypto itself.

After which, it has slowly become common knowledge that the blockchain technology could severely affect various transactions of finance and commerce worldwide, which include various financial technologies.

Due to this, start-up businesses and banks have tried to find ways to cope up with the innovation brought by blockchain technology. The goal is to incorporate blockchain throughout various departments or divisions and to streamline different processes with it.

Aside from merely coping up with the new technology, businesses and banks also aim to provide efficiency with their operations, especially for the convenience of clients, customers, and partners.

Kinesis benefits

Knowing all the possibilities of an economic catastrophe in the not-so-far future, you should definitely find the best ways for you to prepare yourself for the coming of the gold standard monetary system.

Of course, if it’s all about the circulation of real gold back into the economy, the best way to prepare is to invest in gold coins before the big economic crash.

This is where Kinesis comes in.

Kinesis is one of the best ways for you to survive the possibility of a huge economic meltdown because of the new gold standard and could help you flourish through and after the transition. It is a cryptocurrency backed by real gold, running on blockchain for optimal benefits like:

  • You can easily buy gold online through its platform, allowing you to own a certain amount of real gold for each crypto coin you have.
  • Your gold is safe in the Kinesis reserve, giving you the assurance of having enough “gold backed coins” through and after the transition phase of the new gold standard.
  • You don’t have to worry about fiat currencies running out of value since you already have your own currencies backed by gold in the Kinesis reserve.
  • Crypto coins of Kinesis runs on the blockchain, which basically means it’s on a reliable and safe platform for virtual transactions and storage.
  • You can use crypto coins of Kinesis on various transactions right away.
  • If you have real gold in the Kinesis reserve, you can claim your gold anytime you want. These are just a few of the benefits that Kinesis can provide you with, before, during, and after the global economic crash.

It is the ultimate stablecoin because it is backed 1:1 by physical gold and silver, depending on whether you have KAU or KAG, respectively. Gold is stored securely on third-party vaults, eliminating counterparty risks.

Check out Kinesis.money for more info on how to buy gold from Kinesis and what more you can do with this digital currency.