The Gold Standard vs Fiat Money: How the Game Changed and Why You’re Getting Poorer

When I first started my engineering career, I thought I understood how money worked.

I thought the game was simple – go to university, get a good job in a good company and you wouldn't need to worry.

Back then, I had no idea about the difference between the gold standard and fiat money, or why it even mattered.

I just followed what everyone else was doing – work hard, save money, try to invest wisely.

But here's the thing – after 8 years of grinding away as an engineer and still barely having enough for a house deposit, I started questioning everything about our financial system.

This frustration led me to explore alternative investments – read about my journey here

My deep dive into this broken financial system is what originally led me to explore Bitcoin as a solution – read about how I'm achieving financial independence with Bitcoin.

Living in different countries as an expat engineer opened my eyes to something most people never notice.

Whether I was in the UK, Canada, or now in the Middle East, I kept seeing the same pattern:

everything keeps getting more expensive, but wages aren't keeping up. And it's not just random bad luck – it's by design.

You see, once I started learning about the gold standard vs fiat money debate, things started making a lot more sense.

That feeling that something was broken with our money?

Turns out I wasn't crazy at all.

Here's what hit me hard:

The way our entire money system works fundamentally changed in 1971 when we abandoned the gold standard for fiat currency. And most people don't even realize we're playing a completely different game now.

Want to understand why everything keeps getting more expensive? Check out my deep dive into why governments keep printing money and how much your money has been devalued because of this

Think about it this way:

• Under the gold standard, money was backed by actual gold (ye know, something real)
• With fiat money, it's literally just paper backed by… government promises
• This shift completely changed how money gets created and valued
• And it's probably the biggest reason why you're working harder but getting poorer

In this post, I'm going to break down:

• The key differences between gold standard vs fiat money (and why you should care)
• How our financial system transformed from sound money to printed currency
• Why this shift is secretly destroying your savings
• What you can actually do to protect your wealth

And look, I'm not just theorizing here.

As an engineer working across multiple countries, I've seen firsthand how this broken money game affects real people.

Whether you're an expat like me or just someone trying to build a secure financial future, understanding the gold standard vs fiat money system is crucial.

See how I'm protecting my wealth in this broken system in my article about From FIRE to SovFIRE: The New Path to True Financial Independence]

Fair warning: Once you understand how the modern financial system really works, you can't unsee it.

But trust me, that's actually a good thing – because you can't fix what you don't understand.

The Gold Standard: When Money Actually Meant Something Real

Alright, let me break down how the gold standard actually worked – and trust me, as an engineer who loves understanding systems, this one's pretty fascinating.

Back in the day (we're talking pre-1971), money wasn't just some abstract concept that governments could mess with.

It was dead simple: if you had a $20 bill, you could literally walk into a bank and exchange it for actual gold. Try doing that today and they'll look at you like you're crazy!

learn more in my article about what sound money really is

Here's how the gold standard system worked in practice:

• Every dollar/pound/whatever was backed by a specific amount of gold
• Governments couldn't just print money whenever they felt like it
• If they wanted to create more money, they needed more gold (imagine that!)
• This created a natural limit on money printing and government spending

If you imagine you wre the government back then – if you wanted to create more, new, money you would have to buy more gold to back it up.

Now, governments don;t even need to print the actual money, it’s just numbers on a screen.

No wonder government money printing is out of control and the worst part is that your hard earned money is getting devalued more and more every day.

Why The Gold Standard Worked So Well

Think about it like this – in engineering, we use safety factors based on actual physical limitations.

You can't just decide that steel is suddenly twice as strong because you want to build a bigger bridge.

The gold standard worked the same way – it was based on physical reality, not political wishes.

The benefits were pretty clear:

• Price Stability: Things cost roughly the same year after year
• Real Savings: Your money actually kept its value over time
• Limited Government Spending: No endless money printing for wars or bailouts
• International Trade: Countries couldn't cheat by devaluing their currency

Want to see how this compares to modern inflation? Check out my analysis of real inflation rates

The Numbers Don't Lie

Here's something that blew my mind when I first learned about it:

Under the gold standard, prices remained relatively stable for over 100 years.

The cost of a nice suit in 1900 was pretty much the same as in 1800. Can you imagine that happening today?

But here's what really gets me, as someone who's lived and worked in multiple countries:

The gold standard wasn't just some American or British thing.

It was a global system that created stability across borders.

When every currency was tied to gold, international trade and price comparisons were straightforward.

See how this relates to modern banking in my review of The Bitcoin Standard

The Engineering Perspective

As an engineer, I love systems that are:

• Based on physical reality
• Self-regulating
• Resistant to manipulation
• Predictable and measurable

The gold standard ticked all these boxes. It was like having a natural monetary thermostat that kept things in check.

But of course, this system had one major "flaw" – it prevented governments from creating money out of thin air. And guess what? They weren't too happy about that…

Learn more about why governments hate limited money in my post about why governments keep printing money

In the next section, we'll look at how and why this system was abandoned. Trust me, understanding this transition is crucial for protecting your wealth today.

The Great Switch: How We Lost Real Money

Here's where things get properly mental.

Imagine if one day, your building contractor decided that instead of using actual steel beams, they'd just write "BEAM" on a piece of paper and claim it's just as good.

Sounds ridiculous, right? Well, that's basically what happened with our money in 1971.

This ties directly into what I discuss in The Fiat Standard book review

The Nixon Shock – WTF Actually Happened?

So picture this: It's August 15, 1971.

President Nixon gets on TV and casually announces that the U.S. would no longer allow dollars to be converted into gold temporarily.

“Temporarily”…. that was over 50 years ago, I guess someone didn't get the memo on getting back on the gold standard?

Just like that, they changed the fundamental rules of money that had been working for hundreds of years.

Here's the official reason they gave:

• "Protecting the dollar from evil speculators" (yeah, right)
• "Temporary measure" (spoiler alert: it wasn't)
• "Stabilizing the economy" (by making it less stable?)

But Why Did They REALLY Do It?

Look, after spending years trying to understand this stuff, here's what I've figured out. The real reasons were pretty straightforward:

1. Too Much Spending: They'd printed way more dollars than they had gold to back them
2. Vietnam War Costs: Wars are expensive, and the gold standard made it harder to fund them
3. Control: They wanted the power to create money whenever they wanted

Want to understand the implications? See my article on how much your money has really devalued

The Immediate Effects

The crazy thing is, most people had no idea how massive this change was. But check out what happened:

• Currencies started floating against each other (hello, forex chaos!)
• Inflation took off like a rocket
• Government debt exploded
• The savings of ordinary people started melting away

My Personal Wake-Up Call

Working as an expat engineer really opened my eyes to this.

When I started my career, I couldn't figure out why saving money felt like trying to fill a bucket with a hole in it.

The numbers just weren't adding up.

Then I learned about the Nixon Shock and everything clicked. We're all playing a game where the rules changed 50 years ago, but nobody told us!

The Engineering Problem

Here's how I think about it as an engineer: They removed the physical constraints from the money system. It's like:

• Removing the safety factors from structural calculations
• Ignoring material strength limitations
• Pretending gravity doesn't exist

And guess what happens when you ignore physical constraints? Things eventually break.

The New Rules of the Game

After 1971, everything changed:

• Money became pure government fiction
• Central banks got unlimited money-printing power
• Your savings became their inflation target
• The connection between money and reality was severed

And ye know what's mental? They still teach economics in universities as if none of this happened. As if money still works the same way it did 100 years ago.

This shift from gold standard to fiat money wasn't just some boring historical event – it was the moment they changed the fundamental rules of wealth and savings.

And understanding this change is absolutely crucial for protecting your wealth today.

In the next section, we'll look at exactly how the modern banking system works (or doesn't work, depending on how you look at it).

Trust me, once you understand this, you'll never look at money the same way again.

The Modern Banking Game: A System Built on Air

Right, let's get into how banking actually works today.

And fair warning – as an engineer who likes things to make logical sense, this part proper did my head in when I first learned about it.

This ties into what I discovered about real inflation rates and why they're higher than you think

Fractional Reserve Banking: The Magic Money Trick

Remember when you were a kid and your parents told you the bank keeps your money safe in a vault? Yeah… about that. Here's what actually happens:

1. You deposit $1,000 in the bank
2. The bank keeps maybe $100 (the "fraction" in fractional reserve)
3. They lend out the other $900
4. That $900 gets deposited in another bank
5. That bank does the same thing…

And just like that, your $1,000 becomes way more money in the system. It's like they're photocopying money, but legally!

How Banks Create Money Out of Thin Air

As an engineer, this bit properly winds me up.

In engineering, we can't just create something from nothing – we work with real materials and physical constraints. But in modern banking:

• Banks don't lend existing money – they create new money when they make loans
• They literally type numbers into a computer
• Those numbers become "real" money in your account
• And you pay real interest on money that didn't exist before

This is partly why I started looking into personal sovereignty and using alternative hard assets to get there.

The Central Banking Pyramid

Here's how the whole system is structured:

1. Central banks at the top (like the Fed, Bank of England)
2. Commercial banks below them
3. Regular people at the bottom (getting squeezed)

Why This System Is Broken (An Engineer's Perspective)

Look, in engineering, we have something called failure modes analysis. Well, here are the failure modes of our current banking system:

1. No Real Limits: They can create as much money as they want
2. Zero Feedback Controls: Nothing automatically stops money printing
3. Exponential Behavior: Debt must keep growing to prevent collapse
4. Single Points of Failure: Entire system depends on trust in central banks

A Personal Example from My Engineering Career

When I was working in Canada, I got a 3% raise and thought I was doing alright. Then I realized that with real inflation (not the official numbers), I was actually getting a pay cut every year.

It's like thinking you're climbing up a down escalator – you're putting in the effort but still ending up lower than where you started.

Fractional Reserve Banking: It Got Even Crazier in 2020

Remember when you were a kid and your parents told you the bank keeps your money safe in a vault? Yeah… about that. Here's what used to happen:

Banks had to keep a fraction of deposits as reserves – typically around 10%. But hold onto your hat, because in March 2020, something mental happened: The Federal Reserve announced they were reducing reserve requirements to ZERO.

That's right – banks now technically don't need to keep ANY of your deposits in reserve. Let that sink in for a minute.

Here's how it works now:

1. You deposit $1,000 in the bank
2. The bank can technically lend out ALL of it
3. That money gets deposited in another bank
4. That bank can do the same thing…
5. And on and on it goes

This isn't some conspiracy theory – it's literally on the Federal Reserve's website. They replaced reserve requirements with other forms of bank regulation, but the practical impact on money creation is staggering.

The Numbers Are Mental

Here's what's happened since they switched to this system:

• Money supply has gone exponential
• Government debt has exploded
• Real wages have stagnated
• Asset prices have gone nuts

What This Means For You

Working across different countries, I've seen this same system playing out everywhere. Whether you're earning pounds, dollars, or dirhams, here's what you need to understand:

1. Your savings are being devalued by design
2. Traditional banking is a game rigged against you
3. The system requires ever-increasing debt to function
4. We're all playing in a giant pyramid scheme (but a legal one!)

The craziest part? This isn't some conspiracy theory – it's literally how the system is designed to work.

Central banks and governments openly talk about targeting 2% inflation (which really means "we want your money to lose 2% of its value every year").

In the next section, we'll look at what we can actually do about this. Because once you understand the game, you can start playing it differently.

Why This Matters For You (And What To Do About It)

Alright, so now you understand how the system works (or doesn't work). But here's the real question:

What the actual F can we do about it?

First, Let's Talk About Why This Matters So Much

Remember when I told you about working for 8 years and still struggling to get a house deposit? Well, now you know why.

The system is literally designed to:

1. Make your money worth less every year
2. Force you to gamble in the stock market just to keep up
3. Keep you dependent on debt
4. Make the rich richer (through asset inflation)

This debasement of money means that the hurdle rate – the returns you need to generate from your investments every year just to maintain your purchasing power is 11%, yes that’s right – not 3% for inflation only but 8% for money debasement + 3% for inflation (althrough I think infaltion is really much higher than that). I talk about this in more detail in my blog posts on money debasement, the real inflation rate and why this means the hurdle rate for your investments is actually 11%.

The Impact I've Seen Personally

Living and working in multiple countries has shown me this isn't just a problem in one place.

Whether you're in the UK, Canada, or the Middle East, the money printing machine affects everyone.

The everything code, as Roaul Pal puts it is driving everything and is the reason asset prices are going up and will continue to.

Here's what I've noticed:

• Housing getting more expensive EVERYWHERE
• Salaries not keeping up with real costs
• Savings accounts becoming basically pointless
• Investment becoming increasingly complicated

See how I'm addressing this through my SovFIRE strategy

So What Can We Actually Do?

Look, I'm an engineer. I like practical solutions, not just complaining about problems. Here's what I'm actually doing about this:

1. Understanding The Game
   • Learning about monetary history
   • Following real inflation rates, not just official numbers
   • Staying informed about central bank policies
2. Protecting Wealth
   • Moving away from pure fiat savings
   • Looking into sound money alternatives
   • Investigating hard assets
3. Building Independence
   • Creating multiple income streams
   • Learning valuable skills
   • Reducing dependence on the traditional system

The Tools and Strategies I'm Using

More details in my post about escaping the rat race with alternative assets

Here's my practical approach:

1. Short Term Protection:
   • Keeping minimal fiat for immediate needs
   • Using inflation-resistant savings methods
   • Strategic use of debt (when it makes sense)
2. Medium Term Strategy:
   • Building skills for independent income
   • Investing in productive assets
   • Creating side hustles
3. Long Term Planning:
   • Looking into off-grid living options
   • Building community connections
   • Developing real-world skills

A Word of Warning

Look, I need to be straight with you here. None of this is financial advice – I'm just an engineer sharing what I've learned and what I'm doing about it. Your situation might be different, and that's fine.

The key is understanding that:

• The rules of money have changed
• The old playbook doesn't work anymore
• We need new strategies for a new system

What's Next?

Check out my thoughts on why sound money matters

The system isn't going to change anytime soon. But that doesn't mean we're helpless. In fact, understanding how the game works is the first step to protecting yourself from it.

In my next post, I'll dive deeper into specific strategies for building wealth in this broken system. We'll look at practical steps you can take, regardless of where you are in your journey.

Final Thoughts

As an engineer, I love systems that work properly. Our current monetary system… isn't one of them. But rather than just complaining, we need to:

1. Understand it
2. Adapt to it
3. Build alternatives

Remember: Knowledge is power, but only when you act on it.