Gold And The US Dollar Crisis: Charting The Collapse And Bank Run of The Mighty Dollar
The comments below are an edited and abridged synopsis of an article by Hubert Moolman, Gold South Africa
The US dollar banking system is experiencing a crisis of confidence, akin to a bank run, driven by the erosion of trust in the system’s stability. To understand this, we need to take a closer look at the evolution of the US dollar, gold, and the systemic risks that have brought us to this point.
Since the establishment of the gold standard in 1879, the US dollar was redeemable for gold, creating a direct link between paper currency and physical gold. This practice continued until 1933, when citizens lost the ability to exchange their dollars for gold, but the broader system continued to be backed by gold reserves. The ratio between paper dollars (gold certificates) and actual gold held by the Federal Reserve was a key indicator of the banking system’s health. If the amount of paper dollars exceeded the gold reserves, the system was undercapitalized, raising the risk of collapse.
Historically, when paper dollars outnumber gold reserves, a bank run scenario occurs, where citizens and institutions attempt to redeem their paper dollars for physical assets like gold, silver, or land, in anticipation of the currency’s devaluation. Although citizens lost the ability to redeem paper dollars for gold in 1933, the backing of gold remained central to the value of the US dollar.
When the Bretton Woods Agreement was signed in 1944, the US dollar was still backed by gold, with the gold reserve constituting 78.8% of the monetary base. The US dollar was strong, in part because it was the world’s reserve currency, and the country held the largest gold reserves. However, over time, the US increased its issuance of paper dollars relative to its gold reserves, a trend that continued for decades. This practice is a hallmark of fractional reserve banking, where more currency is issued than there is physical backing.
In January 1971, the US was forced to end the dollar’s convertibility to gold due to the increasing discrepancy between paper dollars and gold reserves. Despite the end of the gold standard, the system’s reliance on gold continued to influence the dollar’s value. The gold price surged in response to inflationary pressures and the debasement of the currency, a trend that continued through the 1970s.
By 1980, the US dollar was effectively fully capitalized again by gold, as the price of gold surged to unprecedented levels. Yet the cycle of issuing more paper dollars continued, even as demand for gold began to rise again in the 2010s, signalling the market’s growing concerns about the dollar’s stability. As the Fed issued more stimulus in response to crises like the 2020 pandemic, the price of gold surged faster than the US monetary base, signalling a potential crisis.
In conclusion, the US dollar is again facing a crisis, with gold emerging as the asset of choice for those seeking to hedge against currency debasement. The ongoing gold run highlights the fragility of the dollar system and signals a potential shift in the global monetary landscape. Gold’s role in preserving wealth and maintaining stability in turbulent times has never been more critical.