In today’s world, saving money doesn’t work.  A penny saved is not a penny earned.  You can’t work your whole life and save money for retirement because the money you’re saving in your 401(K) won’t be enough to sustain your living during retirement. 

Your saved, hard-earned money won’t be enough because the U.S. dollar is losing value at an alarming pace.  This is due, in part, to a critical decision by President Richard Nixon in 1971 to take the dollar off the gold standard. 

History of the Gold Standard

The U.S. and Britain drafted a system of fixed exchange rates in 1944 called the Bretton Woods System.  It was enacted in 1946, and this agreement allowed governments to sell their gold to the U.S. treasury at the price of $35/ounce.  It made the U.S. dollar an international medium of exchange.  People referred to the Bretton Woods System as the “gold standard” because the U.S. dollar was backed by gold.  Put another way, the standard value of the dollar was gold.  A one dollar bill wasn’t just a piece of paper; rather, it was linked to and backed by a tangible, valuable commodity.   

End of the Gold Standard

For various reasons, President Nixon took the U.S. off the Bretton Woods System (i.e., off the “gold standard”) in 1971.  The U.S. no longer traded gold at $35/ounce and, thus, the link between our currency and commodities was eliminated.  As a result, the U.S. dollar became a pure paper asset.

Effect of Taking the Dollar Off the Gold Standard

Eliminating the link between the dollar and gold had several critical effects.  The most obvious impact was on the dollar itself.

Without the support of gold backing our currency, the U.S. dollar is as valuable as toilet paper.  Well-known investors such as Robert Kiyosaki and Warren Buffett have stated that the U.S. dollar is worthless without pegging it to the gold standard.  

Instead, our currency is now fiat money.  Merriam-Webster’s Online Dictionary defines “fiat money” as “money (as paper currency) not convertible into coin or specie of equivalent value.”  Read that closely.  Our currency is “not convertible” into something of “equivalent value.”  In other words, it is intrinsincally worthless and only has value because the U.S. defines it as a medium of exchange.

How It Affects You

Without a gold standard to back the dollar, inflation goes up. 

A dollar backed by gold meant low inflation.  If the supply of gold stayed the same, the supply of money remained the same.  And the supply of money remained the same because the government could not print more money. 

Without the gold standard, however, the government is free to print more money.  A government that can print money at will is bad news.  An increase in the supply of money dilutes its value and accelerates inflation.  As inflation increases, the dollars you save in your bank account and your 401(K) lose value.  Simply put, inflation wipes out savings. 

If you spend your whole life saving money, you may end up with nothing because you’re saving a paper currency that has no tangible asset-backed value.  Instead of saving, we have to invest in assets with income-producing value, whether it be real estate, a business, etc.  Anything else is a recipe for financial disaster.            

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