In 1944, post World War 2, there was a United Nations meeting where the US dollar was chosen as the world’s reserve currency; prior to this gold was used as a means of exchange between nations.  After the convention in 1944, countries agreed to fix their currency to the U.S dollar which in turn was tied to the price of gold at $35 per ounce. This allowed countries to trade their currency for USD which let them exchange it for gold. When countries did exchange their currency for gold, the gold wasn’t physically shipped instead it was stored in the U.S.

However, in 1971 due to U. S’s commitment to the Vietnam war & the space race, the country began to run a budget deficit; as a result, other countries felt that the US was spending more money than it had gold reserves, because of this, other countries wanted to exchange their US dollars for gold and demanded physical delivery of the gold as they suspected more dollars were being printed and there was a lack of physical gold to support it. To prevent the outflow of gold from the United States, President Nixon halted the USD to Gold conversion system, in order to defend the dollar against speculators. Since then, the US has always had a budget deficit, as there was no longer a connection between the USD & gold, Nixon created a FIAT currency where all currencies were backed by nothing but government promises.

 

This led other countries to purposefully devalue their own currencies to make them desirable trading partners. Does this mean that all countries are running a Ponzi scheme?

(A Ponzi scheme is a fraudulent system that continually gains investors and pays earlier investors with the funds from later investors. The victims believe their profits are sales driven and aren’t from other investors investments. The amount of people in each tier of a Ponzi scheme is similar to a pyramid scheme as the numbers continually grow larger).

With the link to gold now removed the US treasury has been able to spend and borrow as much money as it required. When the government wants money, they simply ask the US Federal Bank for a loan, the Federal Bank then prints the money and the treasury gives a saleable IOU (a government bond that can be purchased by an organisation or individual). Once this sale is made the money has been replenished, however if this money is spent on obligations, services, loans and existing debts the cycle restarts & continuously grows larger; as more debts start to amount, more IOU’s are sold to fund this debt. This then leads to the question where does the Government get the money for the existing IOU loans that have not yet been paid off. This has led many to believe that investing in an IOU is part of a Ponzi scheme. Schemes like these don’t just occur in the U.S as other countries have used similar systems to avoid debt, such as quantitative easing.

 

If this is correct and a Ponzi scheme is being used, the result could be catastrophic as it could contribute to (hyper)inflation; if it is not controlled properly it could lead to increased taxation. This may have a severe knock-on effect for future generations as they may have to foot the bill for the collapse of such schemes.