Skip to comments.Abandoning the gold standard was a seminal moment, and one we're now all paying for
Posted on 08/15/2011 8:09:31 AM PDT by SeekAndFind
Roll out the bunting. Tomorrow is the 40th anniversary of the modern global economy.
That's right: come Monday morning we will have managed to survive four decades of fiat money though, given the chaos in markets in recent weeks, it is anyone's guess how much longer it will last.
On 15 August 1971, with the US public finances straitened by the cost of the war in Vietnam, Richard Nixon finally cut the link between the US dollar and gold. Until then, the US Treasury was duty bound to exchange an ounce of gold with central banks willing to pay them $35.
Suddenly, for the first time in history, the level of the world's currencies depended not on the value of gold or some other tangible commodity but on the amount of trust investors had in that currency. Central banks were allowed to set monetary policy based on their instincts rather than on the need to keep their currency in line with gold.
It was one of those seminal moments whose significance has only gradually become apparent, obscured as it was at the time by Vietnam and then Watergate. But the more one examines economic history, the more obvious it is that this was one of the most important policy decisions in modern history.
Were it not for that decision, it is quite feasible that we would not have suffered the financial crisis of the past four years; or indeed the crisis after crisis that have beset the world's markets. We might not have just faced the most volatile few weeks in markets since 2008.
(Excerpt) Read more at telegraph.co.uk ...
I remember watching a segment about it. If I remember correctly, Nixon did it to screw over Great Britain because they were demanding the US pay its debt to it in gold dollars.
Creating the federal reserve was the problem. Nixon was only reacting to a problem.
It was France I think.
The problem was that the Gold Standard hadn’t been adhered to - too many notes printed for the then-current price of Gold - and France (or whomever) wanted to preserve its buying power.
Correct. The root cause was giving control of America’s money supply away to a private company.
The requirement for a coincidence of wants in a transaction is why barter doesn't work: you need money.
We currently use fiat currency in place of money: but we are starting to realize why this is unworkable. Fiat currency does not act as a store of value: money - true money - does.
Given free market conditions we would probably end up moving to a hybrid system where savings are in Gold/Silver and where paper/electrons based off those savings are used for day-to-day trading.
Pure fiat currencies (I hope) will become a warning from history: - as ludicrous as the 1637 Tulip mania - at least until we collectively forget why fiat currencies are always doomed to failure.
The article makes a good point about all countries being in uncharted monetary seas. However, the first statement in this news report is untrue, which can be confirmed by table 4.2 linked to below. Defense spending never again equaled the 46.9% of the federal budget it did in 1962. LBJs Great Society programs were already starting to break the budget.
Up to WW II any creditable currency was pegged to a gold/silver standard, which would have included the money of Washingtons time as President. During the Revolution the Continental Congress tried printing paper currency not backed by real assets to pay for the war, and hence the term not worth a Continental. Then during the Civil War, both the Union and Confederacy issued paper currency unsupported by real assets. Depending on Union fortunes, the paper traded as low as 40% in relation to gold coins. By 1864 Confederate currency had a gold value of five cents on the dollar. The U.S. didn’t try anything like that again until FDR confiscated gold coins during the Depression, but silver coins were still minted and still freely circulated.
While WWII destroyed most economies of the world, the United States prospered. The only way to restart international economic activity was for the U.S. to take the lead, which it did with the Bretton Woods Agreement. Every currency had a fixed value in relation to the dollar, and the U.S. kept everything functioning by buying and selling gold at $35 an ounce. Therefore, once again there was a U.S. gold standard and the dollar became the worlds reserve currency. However, Americans could not take their Federal Reserve Notes to a Fed bank and trade them for gold.
The U.S. unilaterally abrogated the agreement in August 1971, allowed the dollar to float in relation to the trading whims involving all paper currencies. Until about 1968 people could still trade their Federal Reserve notes for Silver Certificates and trade those for packets of silver from a Federal Reserve Bank. When the government renounced that option, silver coins quickly disappeared from circulation. At this time the working careers of a single generation comprise the totality of comprehension for how the international community was to function economically without currencies emerging from things people can touch and see.
The U.S. unilaterally abrogated the agreement in August 1971, allowed the dollar to float in relation to the trading whims involving all paper currencies
Under BW, foreign currencies were tied to target exchange rates with the dollar. The breaking of the BW agreement meant that every currency on earth became a fiat currency overnight: they were tied to a currency that was suddenly no longer backed by gold.
Nixon had to take the dollar off the Gold standard because Gold had become undervalued in dollars - i.e. the money supply had been increased to pay for (I guess) the Vietnam war and the general costs of fighting Communism. The French were behaving rationally, if impolitically, to retain their purchasing power. Nixon acted rationally to retain
America's France's the Gold.
Whatever the reasons: Nixon's actions meant we were left with no currencies formally backed by precious metals. This is why the Great Fiat Crash, when it comes, will hit everyone on earth.
The point I hope people notice from my post is:
At this time the working careers of a single generation comprise the totality of comprehension for how the international community was to function economically without currencies emerging from things people can touch and see.
Based on the history human ability to get it right the first time concerning economic issues, there is a vanishingly small probability of avoiding a Great Fiat Crash.
How fitting today, although not related to the premise of the song, are the lyrics: “You’re indestructible/Always believe in/because you are/Gold ...” - From Spandau Ballet’s 1983 song “Gold” (follow-up to their biggest hit, “True”)