How humans store value

the history of money and why it matters to everyday citizens

The British pound, one of the world’s oldest currencies, has a rich history that spans over 1,200 years. Its origins can be traced back to the Anglo-Saxon era, where the pound was initially used as a unit of weight for silver. The name “pound” comes from the Latin word “pondus,” meaning weight. The silver pennies minted in the 8th century were the first form of currency in Britain, and the pound was established as a unit of account equivalent to 240 silver pennies. The gold sovereign, introduced in 1489, became a key part of the currency system, and the Bank of England was founded in 1694, issuing the first banknotes. The pound’s value has fluctuated over the centuries, influenced by various factors such as wars, economic policies, and the gold standard. The gold standard era, from 1816 to 1931, saw the pound’s value fixed to gold, but this system was abandoned during the Great Depression. Decimalization in 1971 simplified the currency system, replacing the complex structure of pounds, shillings, and pence with a decimal system of 100 new pence to the pound. This change made transactions easier and brought the British currency in line with the majority of the world’s currencies. Today, the pound is the fourth most-traded currency in the foreign exchange market and remains a key component of the global financial system. Its history reflects the economic and political developments in the United Kingdom, showcasing its resilience and adaptability over the centuries.

From 15:00 in Alden’s video above, see the path of centralisation and efficiency for the past 200 years, and how this is unravelling in the current era.

https://upload.wikimedia.org/wikipedia/commons/1/17/Us-gold-certificate-1922.jpg

The decay of the gold standard for the US dollar is a process that unfolded over several decades, culminating in the complete abandonment of the system in the early 1970s. The gold standard is a monetary system where a country’s currency or paper money has a value directly linked to gold. Here’s a brief overview of how the gold standard decayed for the US dollar:

  1. Classical Gold Standard (Late 19th Century to 1914): The US was on a bimetallic standard until 1879 when it officially adopted the gold standard. During this period, the dollar was convertible into a fixed amount of gold, and this system helped to stabilize the value of the currency and facilitate international trade.
  2. Interwar Period (1914-1944): The gold standard was suspended during World War I and was only partially restored afterward. The Great Depression in the 1930s led to a global financial crisis, and many countries, including the US, abandoned the gold standard to use monetary policy to combat deflation and economic contraction.
  3. Bretton Woods System (1944-1971): After World War II, the Bretton Woods Agreement established a new international monetary system. Under this system, the US dollar was pegged to gold at $35 per ounce, and other countries’ currencies were pegged to the dollar. This made the dollar the world’s primary reserve currency. However, the system put pressure on the US to maintain sufficient gold reserves to back the dollars in circulation.
  4. Nixon Shock (1971): In 1971, facing growing inflation, a weakening economy, and a persistent balance of payments deficit, President Richard Nixon announced that the US would no longer convert dollars to gold at a fixed value, effectively ending the Bretton Woods system. This event, known as the Nixon Shock, marked the end of the gold standard for the US dollar.
  5. Floating Exchange Rates (1971 Onwards): After the Nixon Shock, the world moved to a system of floating exchange rates, where the value of currencies is determined by market forces rather than being fixed to gold or another currency. This allowed central banks more flexibility in conducting monetary policy to manage economic conditions.

The decay of the gold standard was driven by the need for governments to have more flexibility in managing their economies, especially during times of economic stress. The move away from the gold standard allowed for more active monetary policy, such as adjusting interest rates and engaging in quantitative easing, to stimulate economic growth and control inflation. However, it also meant that the value of the dollar became more subject to market fluctuations and central bank policies.

The “petrodollar” refers to the US dollar earned by countries through the sale of their petroleum (oil) exports. The term gained prominence after the 1973 oil crisis and the subsequent decision by oil-exporting countries, particularly those in the Organization of Petroleum Exporting Countries (OPEC), to price their oil in US dollars. This pricing decision was a significant factor in the US dollar’s role as the world’s primary reserve currency.

Here’s how the petrodollar system works:

  1. Oil Pricing in US Dollars: Oil is traded globally in US dollars, which means that countries purchasing oil must pay for it in dollars. This creates a constant demand for the US dollar in international trade.
  2. Recycling of Petrodollars: The oil-exporting countries accumulate large reserves of US dollars from their oil sales. They then have several options for these dollars, including reinvesting them in the United States through the purchase of US Treasury securities, investing in American assets, or using them to buy goods and services from other countries.
  3. Impact on Global Finance: The petrodollar system reinforces the US dollar’s dominance in international finance. It supports the dollar’s status as the world’s primary reserve currency, which in turn allows the United States to borrow at lower interest rates and engage in trade with a built-in advantage.
  4. Economic and Political Implications: The petrodollar system has significant economic and political implications. It ties the economies of oil-exporting and oil-importing countries to the US dollar, influencing exchange rates, trade balances, and international relations. It also gives the United States considerable influence over global financial markets.

The petrodollar system has been a cornerstone of the international monetary system since the 1970s. However, it has also faced challenges, including calls for oil to be priced in other currencies or in a basket of currencies, as well as the potential for changes in global energy markets to reduce the reliance on oil. Nonetheless, the US dollar remains the primary currency for oil transactions worldwide.

It has been reported that a 1974 agreement between Saudi Arabia and the US, known as the ‘petrodollar deal’, was not extended and officially ended on June 9, 2024. The agreement may have been prompted by Saudi Arabia’s need to invest the surplus income from its oil exports. An economist explained that in June 1974, the US and Saudi Arabia set up a Joint Commission for economic cooperation to assist Saudi Arabia in spending its surplus dollars on American goods. In July of the same year, Saudi Arabia agreed to invest its oil revenues in US Treasury securities, a fact that remained confidential until 2016, as mentioned by Paul Donovan, the chief economist at UBS Global Wealth Management in his blog post. Donovan also noted that oil has historically been traded in currencies other than the dollar. In January 2023, Saudi Arabia signaled its openness to negotiating oil sales in alternative currencies. However, this potential shift is expected to have a minimal impact on financial markets, as Saudi Arabia’s currency, the riyal, is pegged to the dollar, and its financial assets are predominantly in dollars. The dollar’s status as a reserve currency is more dependent on how it is held rather than how transactions are denominated, Donovan added. Despite the potential leverage that large buyers in Saudi Arabia may have over currency selection, the alliance between the US and Saudi Arabia remains robust. Saudi Arabia is a key ally of the US in the Middle East, particularly important for the purchase of US military equipment, which is priced in dollars. Despite China’s significant holdings of dollars compared to Saudi Arabia’s, efforts to diminish the dollar’s status as the world’s primary reserve currency have been largely unsuccessful. The dollar’s dominance in global oil trade, including transactions, transportation, and insurance, is not expected to change, even if Saudi Arabia were to consider selling oil for yuan. Using dollars streamlines transactions, in contrast to India’s experience of buying Russian oil in their respective currencies, which has raised concerns for Russia about what to do with the surplus. While Saudi Arabia might investigate using oil revenues to purchase Chinese exports, this can also be easily accomplished with dollars. The oil industry’s use of the dollar as the main trading currency is unlikely to be significantly challenged.

The definitions of commodity money are given in more detail in this post by economics online.