End of the Gold Standard – The turning point for money and payments

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Studying the evolution of money or numismatics is one of the most pragmatic and fascinating subjects. The transition of money is inextricably intertwined with payments for obvious reasons, money is the primary medium of exchange in commerce. It is little wonder that when US President Nixon terminated the Gold Standard on the 15th August 1971, he arguably triggered a process of proliferation of the payment industry whose effects are manifesting until today. Up until that fateful day when the US dollar seized to be the international reserve currency as conceived at Bretton Woods, every unit of currency globally was supported by gold in vaults. Any monetary authority around the world could redeem US currency at the standard rate of US$35 per ounce. The gold standard termination effectively freed governments worldwide to print money without having to allocate enough gold to support their currency. This marked the first occasion in the history of man that money was decoupled from a symbol of money or actual commodity of value. Money moved from specie into the fiat monetary system, where notes, coins and exchange rates could be managed by nation-states without reference to the gold window.

    Carl Menger is credited with the evolutionary theory of money, which asserts that money was an outcome of the market seeking to make transactions as efficient as possible as opposed to it being a creation of the state, a view held by scholars like Georg Knapp.Fast forward 50 years, the de-coupling of money from symbols and commodities have reached a totally different level. Cryptos are one of the most intriguing and least understood forms of money. The spirit and objective of cryptos is in some respects to decentralise money-creation from governments, which in some instances have destroyed value through monetary policy transmitted via fiat currency e.g. inflation. Crypto enthusiasts’ mantra is ‘we don’t need kings to coin our currency’, and going by history they have a strong case. Having lived through a hyper-inflationary economy and witnessed a market making unilateral decisions on the currency to use, one does understand better the risks that the termination of the gold standard set us on. As much as cryptos bring transparency into the movement of value via the distributed ledger, its connection with money the symbol or commodity as envisaged by Alexander Hamilton or the barter system remains contentious. With all the ground-breaking innovations around payments, will we see creativity towards or further away from a commodity of value? Or will we see the market seeking to make transactions as efficient as possible as opposed to it being a creation of the state, whilst unyieldingly protecting value from the indiscretions of central governments? Will central banks neutralise the crypto impact by embracing the concept and issuing their own?