Why We Now Measure Gold in Dollars—And Not The Other Way Around
The comments below are an edited and abridged synopsis of an article by Frank Shostack
Prior to 1933, the word ‘dollar’ referred to a unit of gold that had a weight of 23.22 grains. Since there are 480 grains in one ounce, this meant that one dollar stood for 0.048 ounces of gold, and one ounce of gold referred to $20.67.
The present floating exchange-rate system is a by-product of the Bretton Woods structure of fixed currency rates of exchange, which was in operation between 1944 and 1971.
Within the Bretton Woods system, the dollar served as the international reserve currency upon which all other currencies could pyramid their money and credit.
The dollar, in turn, was linked to gold at $35 per ounce. Despite this, only foreign governments and central banks could redeem their dollars for gold.
A major catalyst behind the collapse of the Bretton Woods system was the loose monetary policies of the US central bank, which pushed the price of gold above the official $35 per ounce.
The growing margin between the market price of gold and the official $35 per ounce price created enormous profit opportunity, which some European central banks decided to exercise by demanding that the US central bank redeem dollars for gold. The link between the dollar and gold was cut in August 1971.
As Rothbard wrote: “No one prints dollars on the purely free market because there are, in fact, no dollars; there are only commodities, such as wheat, cars and gold.”