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 ofthe U.S. withdrawal from the Bretton Woods agreement.
What was the crisis? The United States was involved in fighting the Vietnam War. The economy wasplagued by inflation, with depleting gold reserves.
One crisis led to another. Military and social security spending led to more debt, which was paidby 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 goldreserves. The country was facing either a dollar devaluation or an imminent run on the rest of its goldreserves.
That is why on August 15, 1971, President Richard Nixon closed the gold window and brought an endto the Bretton Woods system.
Going off the gold standard resolved the crisis in the short run. It seemed like a reasonablething to do. The currency crisis was avoided. The U.S. avoided the devaluation. However, the move had unforeseenconsequences.
After the end of the gold standard, the dollar’s purchasing power declined rapidly. In the fiftyyears 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 othermajor central banks are at least as expansionary as the Fed. However, that status did not protect it from losing75% 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 ofgold, 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 mentalmodels 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 tothe economists, what can a startup founder learn from the abolition of the gold standard? Three things come tomind.
Don’t be reckless
Raising more money than you need can be tempting especially when you start to get too many knockson your door. While doing that might be worthwhile in certain circumstances (you can raise money at anunreasonably 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 soand 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 thedegradation of your culture. If you are growing too fast, management can be almost impossible, because theremight 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 thedegradation of your culture.
A startup is really a journey in derisking various dimensions and each round of financing couldbe used to mitigate certain risks (technology risk, development risk, market risk, etc.). Spending recklesslymight 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 havesufficed. When you are starting up and cash is scarce, reading in the media about options being the perfectsubstitute 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 canpresent themselves as rather urgent. You must have the best UI/UX design in the world. You need accounting andlegal 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, theequity should not be parted with. Reserve that equity for your long-term team members and long-term advisors onyour advisory board. Compromise a little on your ambitions, make do with what you have, de-risk further so youcan 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 advisoryboard.
The same goes for handing out equity to co-founders. Too many love stories around this: Foundermet Founder, they fell in love, and then they split (it equally). Let the equity justify the roles andresponsibilities.
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. Leteverything rest on a solid foundation of your values and your non-financial vision. That’s your gold. Hold on toyour anchor firmly. Never let it slip away.
The more you move away from your anchor, the more you would devalue your currency. Crises canmake 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 acrisis surfaces. If you believe you are too busy to do this, you are wrong. A founder is primarily the ChiefContemplation Officer of the startup. Only you can find deep hidden insights that most others would miss even inbroad daylight.
If you aren’t spending at least 90 minutes a day in deep thought about your values and yournon-financial vision, you are operating at a sub-optimal capacity, no matter how successful you are. Don’t letyour valuation fool you into believing otherwise.
Regular Contemplation on your values provides you with a steady conviction, much needed when acrisis 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 youmight make decisions based on an external reference point rather than an internal compass. Not being in constanttouch with your values can tempt you into making decisions that reward you in the short run, sometimes even atthe expense of harming others, especially when you have a lot of money backing you. It can tempt you into addingfeatures 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 youin the short run, sometimes even at the expense of harming others, especially when you have a lot of moneybacking you.
If you do that for too long, you could get so used to doing it that it doesn’t even hurt yourconscience 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 holdfirm. The dollar lost its value because it lost its anchor, which could have happened because of recklessspending, which could have happened because the right people did not spend sufficient time thinking deeply abouttheir values.
A startup that stays anchored to its values is good for the founders and their families, for theemployees and their families, for the customers and their families, and for the investors and their families.
Think about it.