For centuries, the currencies of the world
were backed by gold. That is, a piece of paper currency issued by any
world government represented a real amount of gold held in a vault by
that government. In the 1930s, the U.S. set the value of the dollar at a
single, unchanging level: 1 ounce of gold was worth $35. After World
War II, other countries based the value of their currencies on the U.S.
dollar. Since everyone knew how much gold a U.S. dollar was worth, then
the value of any other currency against the dollar could be based on its
value in gold. A currency worth twice as much gold as a U.S dollar was,
therefore, also worth two U.S. dollars.
Unfortunately, the real world of economics outpaced this system. The U.S. dollar suffered from inflation (its value relative to the goods it could purchase decreased), while other currencies became more valuable and more stable. Eventually, the U.S. could no longer pretend that the dollar was worth as much as it had been, so the value was officially reduced so that 1 ounce of gold was now worth $70. The dollar's value was cut in half.
Finally, in 1971, the U.S. took away the gold standard altogether. This meant that the dollar no longer represented an actual amount of a precious substance -- market forces alone determined its value.
click here for download file
Unfortunately, the real world of economics outpaced this system. The U.S. dollar suffered from inflation (its value relative to the goods it could purchase decreased), while other currencies became more valuable and more stable. Eventually, the U.S. could no longer pretend that the dollar was worth as much as it had been, so the value was officially reduced so that 1 ounce of gold was now worth $70. The dollar's value was cut in half.
Finally, in 1971, the U.S. took away the gold standard altogether. This meant that the dollar no longer represented an actual amount of a precious substance -- market forces alone determined its value.
click here for download file
