Image Source: Pixabay

The US dollar banking system is in the midst of a bank run by the measures that I will illustrate here.

Since the 1879 gold standard was established in America, the US dollar could be directly redeemed for gold within the banking system. This continued even after the Federal Reserve was created and until it was ended for citizens in 1933.

In such a system, the measure of actual gold held by the banking system ( the true monetary base) versus the gold certificates (paper dollars but measured as the monetary base) with which gold could be redeemed is a relevant measure of how well the banking system is capitalised.

If the gold certificates (paper dollars) issued are way more than the actual gold (true monetary base) in the banking system, then the system is under capitalised, which means the risk of default is increased.

In such a case, there would be a push to redeem certificates (paper dollars) for gold at the banks. Although this option was out for citizens after 1933, they could still redeem their gold certificates (US dollars) for other physical assets like silver, land, or anything else. So, the option to opt out due to the currency being disproportionately debased was always there.

The level of gold capitalisation in the US dollar banking system, among other things, was a key reason why the US dollar became the world reserve currency. When the Bretton Woods agreement was made, the gold backing was 78.8% (still fairly respectable considering historical levels prior to the 1933 executive order).

In other words, when the Bretton Woods agreement was made, the official monetary base, or US dollars issued, was $26.927 billion (equivalent to about 769 million ounces of gold). The US monetary gold (true monetary base) at that time was 606 million ounces of gold (valued at $21.21 billion). So, every dollar was 78.8% backed by actual gold held by the Federal Reserve banking system.

The US was in a dominant position due to a well-capitalized banking system (relatively speaking), having the biggest gold stash, and being a key player in the war and its conclusion. This (the level of gold capitalisation) is a part of the “DNA” of the US dollar and is even relevant after Nixon ended the direct convertibility to gold in 1971.

When the US dollar becomes too debased, or cannot be trusted due to war or the risk of theft (think Russia), then nations could naturally go to an asset like gold (which they are already doing) as a reserve asset instead. While the dollar still has value it can be redeemed for gold to avoid the risk that debasement of the currency presents, which means that the situation is virtually the same now as before 1971, when gold could still be directly redeemed.

Below is a long-term chart (macrotrends.net) of gold relative to the US monetary base:

(Click on image to enlarge)

In January 1934, gold was revalued (but in reality, it was the US dollar that was devalued to adjust to the market price of gold) from $20 to $35 per ounce. This revaluation caused the gold backing of the gold certificates (paper dollars but measured as the monetary base) to hit above 98% and later even go higher.

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