What Gold Can Do That Cryptos Can’t — Monetary System

What Gold Can Do That Cryptos Can’t — Monetary System

In 1799, a Frenchman named Bouchard discovered the Rosetta Stone in Egypt.

This artifact was the key to unlocking two ancient languages — Greek and Egyptian hieroglyphics.

The equivalent of the Rosetta Stone in the economy is the monetary standard. In other words, whatever measure we use to quote the price of everything.

Today, we actually have no standard. ‘Fiat’ currency is not pegged to anything, so it gyrates all over the place.

It wasn’t always so!

We will explore today how our financial system moved from one monetary standard to another because I see a shift happening now. This will impact your portfolio and wealth for years to come.

Could we come full circle back to gold? I think we should!

The price of gold was largely stable, until 1971.

We could take our dollar note to the bank and get a gold coin. We could measure our wages in units of gold.

Gold was a stable monetary standard because the price of everything in terms of gold would not move by much.

We could say that gold was like the Rosetta Stone back in the day.

The rising status of the US dollar

The Bretton-Woods system gradually replaced the gold standard by putting the US dollar on par with gold.

This system worked for over 20 years.

Then came the politicians…

The US was heavily involved in the Korean War and the Vietnam War during the 1950s and 1960s. These wars left the government heavily in debt. Their gold reserves began to decline to the point the US government had to find a way to keep their gold from going overseas.

President Nixon closed the gold exchange window in August 1971, effectively decoupling gold and US dollars. They replaced the US dollar backing with oil in 1972 when Secretary of State Henry Kissinger entered an agreement with the Saudi Royal Family. The Saudi Royal Family would lead the nations to sell oil in US dollars only. In exchange the US would provide military protection to the Saudi Royal Family.

People around the world trade widely in the US dollar since modern society lives on oil. We need it to keep the lights on and move around. We could even say the price of goods and services moves with petrol prices.

This means that price levels were stable under the US petrodollar system, right?

Not at all.

Wars, deficits, and dollar depreciation

The last 50 years have seen the US continue to wear itself out through wars and deficit spending. US government debt increased from US$1 trillion in the early 1980s to over US$28 trillion today. This does not include the non-government debt and other liabilities, which would bring the debt levels to over US$100 trillion.

The mind-boggling increase in debt levels also means that the US dollar is becoming increasingly worthless.

We can see it in the prices of goods and services, and also the asset markets. They have been rising rapidly.

Remember how a good monetary standard is one where prices are stable?

With the rise of cryptos, this illusion is fading fast.

Why? Maybe you guessed…


Since Bitcoin [BTC] made its debut in 2008 cryptos have become increasingly accepted in our society as a means of exchange. Visa and several companies are accepting payments in cryptos. Some employers have been paying wages in cryptos.

However, as we’ve seen, they’re extraordinary volatile! Bitcoin is down 50% since its recent high.

And yet…

A post-fiat monetary standard

The US dollar is quickly losing its purchasing power, just like other currencies. The end of the fiat currency system is coming. However, when it disappears, what is going to replace the US dollar as the standard measure of the price of everything?

This is something I have not been able to get my head around.

One thing I know, though.

People will likely prefer cryptos over gold as a means of exchange. Cryptos are more secure and easier to store.

However, the price of cryptos vary too much, even on daily basis. Imagine a society trading in coins whose price can change 30% in a day.

Also, not everyone will be able to agree with the price of cryptos because many do not understand its technology.

The price of cryptos needs to be measured by an asset with a stable price.

Which asset will that be? We can look back to history as a guide.

The central bankers pegged their currency against gold, and then oil. They tried to control the prices of both. These bankers are still controlling the price today, although they are losing their grip.

Could we see a crypto monetary system backed by gold? That would see society going back full circle.

I expect it to happen…and for it to take the price of gold up multiples of what it is now.


Brian Chu Signature

Brian Chu,
Editor, The Daily Reckoning Australia

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