Abandoned Gold Standard Guarantees Inflation
In recent weeks, as prices have surged higher, “revived” inflation has become the topic du jour
among establishment writers. Unfortunately, these writers point to the
usual suspects, i.e. higher energy costs, higher interest rates, etc.
In fact, inflation was guaranteed when the United States abandoned the
The United States abandoned
gold as the foundation of its monetary system in two steps. In 1933,
President Franklin Roosevelt ended Americans’ right to surrender paper
dollars for gold and even to own gold bullion. Step two came in 1971
when President Richard Nixon “closed the gold window” and denied
foreign governments the right to turn in paper dollars for gold.
Roosevelt’s move was a major step in shifting the world from the gold standard to the gold exchange standard. Under the gold standard,
governments fixed the prices of their currencies in terms of a
specified amount of gold and stood ready to convert their currencies
into gold at the fixed prices.
Under the gold exchange
standard, governments could hold U.S. dollars and British sterling as
reserves because those currencies were “exchangeable for gold.” The
move to the gold exchange standard became official with the
adoption of the 1944 Bretton Woods Agreement. When Nixon closed the
gold window, those nations counting paper dollars as reserves found
themselves holding paper instead of gold.
in 1974 President Gerald Ford signed legislation that permitted
Americans again to own gold bullion, that legislation did not put the
United States back on the gold standard.
Under the gold standard,
a government is limited—both legally and practically—as to how much
paper money it can print. As recently as the Lyndon Johnson
administration, the U.S. could print paper dollars equal only to four
times the value of the nation’s gold reserves.
Under the gold standard,
governments that print too much paper money risk runs on their gold
reserves. Runs occur as holders of the paper seek to convert to gold
before the vaults are empty. A run on the dollar is what happened in
the late 1960s, which culminated in President Richard Nixon closing the
gold window in 1971.
“Closing the gold
window” is a euphemism for the U.S. defaulting on its promise to other
countries to redeem dollars for gold. As an alternative, Nixon could
have devalued the dollar and continued to redeem. In effect, he chose a
one hundred percent devaluation, a de facto default on the promise to redeem.
the 34 years before Nixon closed the gold window, the money supply in
the U.S. grew less than two fold. In the 34 years after Nixon’s action,
the money supply expanded 13 fold. The Fed’s massive inflation of the
1990s resulted in the greatest advance in stock market history.
Continued inflation is now pushing housing prices to record levels.
Automobiles now cost more than houses did only thirty years ago.
establishment assertions that the dollar is “sound,” investors should
prepare for further declines in the value of the dollar and plan their
investments accordingly. History shows that no government, after going
on a fiat monetary system, ever reverses course until its
paper currency is destroyed. There is no reason to believe this time
will be any different. For information about investing in gold, visit our Gold Page.