Investments: Why the Dollar Left Gold
For much of our nation’s history, the value of the U.S. dollar was actually tied to something… gold. This seems hard to believe, especially for younger generations, as for decades now we have lived in a society that cherishes fiat currency, or a government-issued currency that is not backed by a hard asset like gold. This was not always the case, as fiat currency has only been used in the U.S. since the early 1970s. Before that, there was the Bretton Woods agreement. Established in 1944 by delegates from 44 of the Allied nations, Bretton Wood’s main objective was to create a stable postwar economic order through a new global monetary system. To prevent countries from “competitively devaluing” their currencies or, in layman’s terms, deliberately weakening them to make exports cheaper, the founders agreed to fix their country’s currency to the U.S. dollar. In turn, the U.S. dollar would be fixed to gold at a rate of $35 per ounce, allowing foreign banks to convert their currency to gold at that rate. In the years following WWII, one of the biggest concerns was of a “dollar shortage.” European nations needed dollars to import food, energy, and other goods necessary to rebuild their war-torn economies. Currency devaluations helped make European exports more competitive and allowed these countries to earn additional dollars. Over time, however, the problem reversed. As the global economy expanded and U.S. dollars increasingly flowed overseas through direct investment, military spending, foreign aid, and balance of payments deficits, the amount of dollars held abroad grew much faster than the U.S. gold supply. This became known as the Triffin Dilemma. The U.S. essentially had more foreign dollar liabilities than they could convert into gold at $35 per ounce if there was ever a run on the bank, and global confidence in the dollar as the global reserve currency subsequently decreased. These pressures continued to build until the “Nixon Shock” of 1971, which saw President Richard Nixon suspend the dollar’s convertibility into gold. By 1973, the Bretton Woods system was officially at an end. With that decision, the dollar’s value no longer was tied to a fixed quantity of gold, ushering in the modern era of fiat money that we know today. Under a system tied to gold, the government’s ability to expand the monetary supply was constrained by the amount of gold it had on hand. Under today’s fiat system, the Federal Reserve has substantially greater flexibility to respond to recessions, financial crises, and other economic changes. However, this flexibility puts even more emphasis on the importance of monetary credibility and fiscal discipline, especially now, as large federal deficits and growing government debt reinforce concerns surrounding inflation, borrowing costs, and the long-term purchasing power of the dollar. The end of the gold standard fundamentally changed the global financial system, giving policymakers greater flexibility while placing greater responsibility on governments and central banks to preserve confidence in their currencies. For investors, the lesson is not that gold is superior to the dollar, but more so that preserving purchasing power requires owning productive and diversified assets that can grow over time as the value of money changes.
Sources: Federal Reserve History 11/22/2013
Planning: Setting Goals
A successful financial plan begins with a clear understanding of where you want to go. Without clearly defined goals, it’s difficult to know what direction you are heading or whether the financial decisions you are making today are actually moving you in the right direction. Whether you want to retire at a certain age, pay for a child’s education, purchase a home, travel in retirement, or leave a legacy to your family and church, defining what matters most gives your financial plan a clear sense of direction and purpose. Financial goals should be specific, measurable, and tied to a realistic timeframe. For example, instead of saying, “I want to retire comfortably,” determine when you would like to retire, what you want life to look like after retirement, and approximately how much income you will need to live that lifestyle. Then, your savings, investment, tax, and retirement strategies can all work together toward that same destination. Goals will inevitably change as life changes, but knowing where you are headed makes it much easier to measure progress and make adjustments along the way. Ultimately, financial planning is not simply about accumulating more money but intentionally stewarding your resources in a way that moves you toward the life and legacy you want to build.
This material is provided for informational and educational purposes only and should not be construed as personalized investment, legal, tax, or accounting advice. Advisory services are provided only pursuant to a written advisory agreement. Information contained herein has been obtained from sources believed to be reliable; however, we do not guarantee its accuracy or completeness.
