The government’s past and present approaches to currency production have had a marked effect on the U.S. economy, says Kevin DeMeritt of Los Angeles-based gold and precious metals firm Lear Capital.

While U.S. currency was once backed by gold and silver, consumers haven’t been able to redeem bills for gold since 1934, when Congress amended Section 16 of the Federal Reserve Act. Silver hasn’t been an option since the 1960s, according to the Board of Governors of the Federal Reserve System.

During that decade, the international monetary system and primarily fixed currency convertibility structure that 44 nations, including the U.S., had collectively established in 1944 — known as the Bretton Woods system — began noticeably unraveling.

With the demand for international gold reserves outweighing the global supply, and the U.S. balance-of-payments deficit exceeding its stock of the asset, the government appeared to possibly not be able to meet its obligations to convert dollars for gold at the agreed price, prompting concern the dollar might have to be devalued.

A second attempt at hashing out a global exchange rate structure in 1971, dubbed the Smithsonian Agreement, didn’t last. By about a year and a half later, for essentially the first time, according to the Federal Reserve, most of the world’s currencies had transitioned to a monetary standard that relied on paper redemption, instead of precious metals.

The Cash Conundrum

Today, the collateral associated with the notes that the Federal Reserve Banks hold involves U.S. Treasury, federal agency and government-sponsored enterprise securities.

The U.S. can essentially print money at will; since 2008, it has produced $22 trillion in currency, according to Kevin DeMeritt, who says that approach toward issuing money has likely influenced inflation — something one study found can occur in scenarios where currency can’t be redeemed for gold or silver.

“The definition of inflation is too much money chasing too few goods,” DeMeritt says. “When you print up that much money, the one effect you’re typically going to get is inflation. The other effect is going to be bubbles; because you have so much money chasing different asset classes it usually creates some sort of bubble, somewhere.”

The Lear Capital founder says the corresponding cycle — bubbles raising interest rates, followed by a crash — can be heightened with more money in circulation; currency creation can also affect the dollar’s value.

“[With] every dollar you print, the money that’s already out there becomes worth less and less,” Kevin DeMeritt says. “But I can only mine so much gold per year; that controls the supply. If you add an increase in demand from paper money onto that physical supply that’s fairly limited, usually, what you’re going to find is prices go up over time. It’s economics 101. So paper money is probably going to continue to fall as they print more of it — it has for hundreds of years now — and the price of gold is probably going to continue to increase because you can’t mine it at the same pace that they print the paper money.”

A Growing Appetite for Gold

U.S. currency practices have also had an impact on other countries’ monetary systems and gold-purchasing habits; Russia, for instance, and China have been selling off U.S. treasuries, Lear Capital’s DeMeritt says.

For the first time in more than a decade, China’s U.S. debt holdings, which according to CNBC, had been declining since 2021, dropped below $1 trillion earlier this year, declining by nearly $23 billion between April and May.

Russia has also been reducing its holdings for some time. In 2018, the nation trimmed its amount from $96.1 billion in March to $14.9 billion in May, an 84% decline.

“Over the past 15 years, they’ve doubled the amount of gold that they’ve held in reserve at their central bank,” Kevin DeMeritt says. “Because we’re printing up all this money — they believe holding a Treasury [security] that pays 3%, when inflation can be 8%, just makes absolutely no sense. They’re paying us 5% to hold our debt. No one wants to do that for long.”

Russia has been one of the most prolific gold buyers in the past decade, according to Nasdaq; China, which has one of the 10 largest reserves in the world, has periodically made significant gold purchases.

Lear Capital’s Founder Advises Taking Steps to Counteract Currency-Related Challenges

By increasing their gold and decreasing their Treasury holdings, Kevin DeMeritt says countries are positioning themselves to be able to make transactions without using the U.S. dollar, which currently functions as the world’s reserve currency.

“If we lost the reserve currency status, people in the United States would have a gigantic wake-up call because things would become much, much more volatile — with oil prices and everything else — because it [would be] denominated in somebody else’s currency,” he says. “That currency goes up and down, and we would pay higher product prices.”

Should that scenario play out in the future, with a stock market upheaval, consumers’ investment could take a hit — making a well-balanced portfolio more important than ever.

“The central banks have been stockpiling gold over the past four or five years because we’ve printed up so much money,” Kevin DeMeritt says. “There’s a distrust that we’ll able to service the debt here in the United States. When you’ve printed $22 trillion since 2008, it’s a cause for concern. You need to look for an asset that’s going to give you stability and offset the volatility from some of the other areas.”

Prices for precious metals like silver and gold have steadily risen over the past 20 years, according to National Mining Association data; both assets have also performed well during a number of politically and economically uncertain times.

As a result, investors may want to consider incorporating an item like a gold IRA — a self-directed individual retirement account where you have ownership of a gold or silver coin, bar or other physical precious metal asset — into their savings plans.

“Gold has an inverse relationship to stocks and other types of assets,” Kevin DeMeritt says. “In times of war or terrorism, usually, you’re going to find the markets become extremely volatile. Nobody knows what’s going on from day to day. The volatility of gold is not going to be the same — it’s going to help give investors the stability they want.”