Abolition of the Gold Standard — Lessons for the Founder
Fifty years ago, a crisis led to the end of the gold standard. 2021 was the 50th anniversary of the U.S. withdrawal from the Bretton Woods agreement.
What was the crisis? The United States was involved in fighting the Vietnam War. The economy was plagued by inflation, with depleting gold reserves.
One crisis led to another. Military and social security spending led to more debt, which was paid by monetary expansion. All the new money in circulation weakened the dollar’s link to gold.
Years of reckless spending and borrowing have led to the depletion of the country’s gold reserves. The country was facing either a dollar devaluation or an imminent run on the rest of its gold reserves.
That is why on August 15, 1971, President Richard Nixon closed the gold window and brought an end to the Bretton Woods system.
Going off the gold standard resolved the crisis in the short run. It seemed like a reasonable thing to do. The currency crisis was avoided. The U.S. avoided the devaluation. However, the move had unforeseen consequences.
After the end of the gold standard, the dollar’s purchasing power declined rapidly. In the fifty years that followed, the dollar lost more than 75% of its purchasing power.
The dollar is still the world’s reserve currency, but it maintains this status because other major central banks are at least as expansionary as the Fed. However, that status did not protect it from losing 75% of its value in terms of the Swiss franc.
In terms of gold, the dollar lost even more value. In 1971, an ounce of gold was traded for $40.80. In 2021, an ounce of gold traded as high as $2000. That is a percentage increase of 4800%. In terms of gold, the dollar lost about 98% of its value!
What can a startup founder learn from this?
Our life is one long learning expedition. The approach of creating and modifying our mental models by studying other domains, events or phenomena can serve us well. You will find insights everywhere, should you take the time to observe. The latter seems to be scarce, the former, not so much.
While we can leave the discussion about whether we should revert to the gold standard or not to the economists, what can a startup founder learn from the abolition of the gold standard? Three things come to mind.
Don’t be reckless
Raising more money than you need can be tempting especially when you start to get too many knocks on your door. While doing that might be worthwhile in certain circumstances (you can raise money at an unreasonably good valuation, the overall money market seems unfriendly but you have an opportunity, etc.), spending it without having thought it through deeply, or merely because others around you seem to be doing so and exhibiting it widely, may not be a very wise decision.
It can lead to devaluing your currency, and in some cases, have other negative consequences. Since startups cannot print currency, when push comes to shove, they could go under.
Reckless spending may also set a wrong precedent inside your organization which may lead to the degradation of your culture. If you are growing too fast, management can be almost impossible, because there might be too many flames to douse. You may realize the consequences only when it is too late.
Reckless spending may also set a wrong precedent inside your organization which may lead to the degradation of your culture.
A startup is really a journey in derisking various dimensions and each round of financing could be used to mitigate certain risks (technology risk, development risk, market risk, etc.). Spending recklessly might lead to erosion of existing capital but with no corresponding mitigation of risks under consideration. This might lead to lower credibility and could even present an existential risk in certain instances.
Don’t be reckless.
Don’t use equity when cash would do
Once every few hours, a founder somewhere in the world hands out equity when cash would have sufficed. When you are starting up and cash is scarce, reading in the media about options being the perfect substitute for cash can tempt you to blindly follow that advice. Don’t do it.
When you are developing your product, there are things you might need and at times, they can present themselves as rather urgent. You must have the best UI/UX design in the world. You need accounting and legal services and nothing but the best will do. But you can’t afford it. So what do you do? Give out equity. Wrong answer.
Find a way to make do with what you have and what you can afford. In most of these cases, the equity should not be parted with. Reserve that equity for your long-term team members and long-term advisors on your advisory board. Compromise a little on your ambitions, make do with what you have, de-risk further so you can have the cash you need to afford the best. Don’t use a parachute to jump off a chair in your living room.
Reserve that equity for your long-term team members and long-term advisors on your advisory board.
The same goes for handing out equity to co-founders. Too many love stories around this: Founder met Founder, they fell in love, and then they split (it equally). Let the equity justify the roles and responsibilities.
Don’t use equity when cash would do.
Don’t lose your anchor
Values — Non-Financial Vision — Culture — OKRs — Stock Options. This is your success stack. Let everything rest on a solid foundation of your values and your non-financial vision. That’s your gold. Hold on to your anchor firmly. Never let it slip away.
The more you move away from your anchor, the more you would devalue your currency. Crises can make people make decisions that may seem appropriate at the moment but may prove to be unhealthy later on. Values hold you steady in such moments. Invest in them. Contemplate on them.
Regular Contemplation on your values provides you with a steady conviction, much needed when a crisis surfaces. If you believe you are too busy to do this, you are wrong. A founder is primarily the Chief Contemplation Officer of the startup. Only you can find deep hidden insights that most others would miss even in broad daylight.
If you aren’t spending at least 90 minutes a day in deep thought about your values and your non-financial vision, you are operating at a sub-optimal capacity, no matter how successful you are. Don’t let your valuation fool you into believing otherwise.
Regular Contemplation on your values provides you with a steady conviction, much needed when a crisis surfaces. If you believe you are too busy to do this, you are wrong.
When you focus too much on the outside, and very little on the inside, chances are high that you might make decisions based on an external reference point rather than an internal compass. Not being in constant touch with your values can tempt you into making decisions that reward you in the short run, sometimes even at the expense of harming others, especially when you have a lot of money backing you. It can tempt you into adding features you know you shouldn’t add, but you do it anyway because it is good for growth.
Not being in constant touch with your values can tempt you into making decisions that reward you in the short run, sometimes even at the expense of harming others, especially when you have a lot of money backing you.
If you do that for too long, you could get so used to doing it that it doesn’t even hurt your conscience anymore. You are numb. You feel nothing. It is just business as usual.
Don’t lose your anchor.
Making your own road
The world might present various temptations to you in all shapes and forms, but you must hold firm. The dollar lost its value because it lost its anchor, which could have happened because of reckless spending, which could have happened because the right people did not spend sufficient time thinking deeply about their values.
A startup that stays anchored to its values is good for the founders and their families, for the employees and their families, for the customers and their families, and for the investors and their families.
Think about it.