Have you ever wondered why we attribute value to the dollar? The government did not simply begin printing money and declare that it is worth something—that’s not how money works.
Once upon a time, the dollar was backed by gold… until 1971. In the 1960s, French President Charles de Gaulle saw the United States spending on the Great Society and the Vietnam War. He got worried about the US government throwing around all that cash without enough gold to back it up.
In large part, his actions led to Nixon severing the gold standard. With the dollar backed by gold, foreign governments with dollars could trade 'em in for actual gold at any time.
As governments like France saw the U.S. spending outlandish amounts of money, they got nervous it was spending more than it held in gold reserves.
President de Gaulle acted to protect France from the wild spending of the United States. France started trading its dollars for gold and pushed the U.S. to the brink.
So by 1971, the draining of gold was unsustainable. Either the U.S. had to slow its spending or sever the link between gold and the dollar. Nixon knew the country was running out of gold because of France, and the system would eventually collapse.
Thus, Nixon chose to preserve spending and closed the gold window, ending the gold standard with one quick swipe of the pen. In the 50+ years since the world has been on a fiat currency system.
This means nothing is backing the dollar, yen, euro, etc., except the faith of the people using the stuff. It’s unlikely that the US will return to a gold-backed currency, simply because doing so would restrain federal spending. However, once the dollar loses its reserve status we could see a new currency using a backing that includes commodities like gold or silver.
It’s more likely to be a currency from a country with a positive trade surplus, like China, and/or one that has an abundance of natural resources like Australia or Canada. The BRICS cohort of countries have also been making the news as of late in their attempts to to gain financial independence from the West. Whichever country or groups of countries does this first will transform their currency into the global leader of stability, precisely as the U.S. dollar was for nearly a century.
