Before the great depression, most of the world used gold as a currency. Of course, that did mean every time someone purchased something they paid for it in gold. Governments maintained a certain amount of gold in their vaults & paper currency was issued against the value of that gold. (In INDIA, the minimum reserve worth Rs.200 cr should be maintained at any point of time, out of these reserves Gold reserves should be worth Rs.115 cr @ Rs. 94/10 grams & a Forex reserve of Rs 85 cr at the current market price. If actual reserves are more than the minimum reserve RBI may prints new currency notes & issues them to deficit banks in form of loans against gold, foreign exchange, promissory notes & treasury notes) So every time you pay paper money you effectively using gold. This system was the “Gold Standard”. Citizens also had the freedom to exchange these currency notes for gold, as and when they deemed fit.
The government ensured that no more notes are printed. The reason was simple if they had to print more money they needed more gold in their vaults because every paper currency note out there was essentially gold. And if citizens got the slightest hint that the government is printing currency, they would all land up at the bank to exchange their paper currency for gold. So even if the government was tempted to print money they would think twice before doing it.
Now, during the time of the great depression, growth was a problem, unemployment was at its peak. Firms were shutting down. One way to create growth was the government printing notes & giving them to people in various ways to spend. Once the citizen got some money in their hands, they would go out and spend it. This ensures that they buy goods & services. And one man’s spending is another man’s income and so the cycle would continue and this would create some growth. And that’s what the government did; they moved out of Gold Standard and went into FIAT Currency i.e. a currency that does not have anything backing it but basically the fiat of government. This gave them the freeway to print any amount of money they want to.
In fact, in the year 1933, the US government confiscated all the gold that its citizens had through Executive Order 6102 signed by the then President Mr. Franklin D Roosevelt, forbidding the hoarding of gold coins, gold bullion & gold certificates by US citizens. They were of course compensated for their gold at the rate of $20.67 per troy ounce (1 troy ounce=31.1grams). So because of this, the government across the world had the freedom to print currency whenever the economy was in trouble. And as per the basics of economics, an increase in supply leads to a decrease in purchasing power. That’s why economists who follow the Austrian school of economics, say that all paper currencies over a period of time go back to their intrinsic value i.e. zero.
So that is why whenever there is a hint of a major financial crisis, people figure out that almost any solution that the governments might come up with will ultimately end up printing more & more money (which the US is doing to solve its financial problem and Europe cant due to its structure). This means decreasing purchasing power. The smart money in this situation always moves to gold. As it is now, people end up treating gold as nothing but what it was always used as i.e. CURRENCY. One should always have at least 25 % of its portfolio in Gold in order to hedge inflation.
Always buy gold in parts of SIP Systematic Investment Plans, or go into Gold ETFs...
Some of the GOLD ETFs are -
GOLD BeES (I prefer this as it is the first-ever launched, more experienced and of huge gold deposits)
READ MY POST ON US PRINTING MORE NOTES
GOLD PRICES PERFORMANCE
