On August 15, 1971, Richard Nixon announced that the US dollar (USD) would no longer be redeemable in gold. This was supposed to be temporary. And yet, fifty-one years later, here we are. The gold standard was gradually destroyed in the twentieth century.
Now people are experiencing the consequences: less purchasing power, more economic cycles, and a weaker economy.
In the chapter 4 of his book What Has Government Done to Our Money?, Murray Rothbard goes over the steps the government took to end the gold standard over the twentieth century, from the end of the classical gold standard to the closing of the gold window in 1971.
The Classical Gold Standard (1815–1914)
The classical gold standard tended to prevent the government from running budget deficits and going into debt, as it could not easily create inflation. In 1913, the Federal Reserve (Fed) was born. When the US entered the World War I, US dollars were printed at an excess of the gold reserves. At this point, the US got off the classical gold standard and this money printing contributed to the depression of 1920–21.
The Gold Exchange Standard (1926–31)
In this regime, the USD and the pound sterling (GBP) were the two currencies of reference (“key currencies”). The US went back to the classical gold standard (converting USD into gold). GBP and other currencies were not convertible into gold (except for large bars). The Great Britain converted GBP to USD and the other European countries converted their currencies to GBP.
So, the Great Britain inflated GBP and the other European countries did the same with their respective currencies (a “pyramiding” of GBP on USD and of other European currencies on GBP).
As Rothbard stated:
Britain and Europe were permitted to inflate unchecked, and British deficits could pile up unrestrained by the market discipline of the gold standard…. Britain was able to induce the United States to inflate dollars so as not to lose many dollar reserves or gold to the United States.
As sterling balances piled up in France, the United States, and elsewhere, the slightest loss of confidence in the … inflationary structure was bound to lead to general collapse. This is precisely what happened in 1931; the failure of inflated banks throughout Europe, and the attempt of “hard money” France to cash in its sterling balances for gold, led Britain to go off the gold standard completely. Britain was soon followed by the other countries of Europe.
Fluctuating Fiat Currencies (1931–45)
In 1933–34 the US abandoned the classical gold standard once again. The USD was defined as 1/35 of an ounce of gold and only foreign governments and central banks could convert it into gold. So, there was a certain link to gold, but the US was in a floating exchange rate regime.
As Rothbard stated, by cutting the ties to gold, this regime:
leave[s] the absolute control of each national currency in the hands of its … government [which can] allow its currency to fluctuate freely with respect to all other fiat currencies … [The flaw] is to hand total control of the money supply to [the government], and then to … expect that it will refrain from using that power.
the disastrous experience of … the 1930s world of fiat paper and economic warfare, led the United States authorities to [aim] the restoration of a viable international monetary order
Bretton Woods and the New Gold Exchange Standard (1945–68)
Thus, enter Bretton Woods (conceived and implemented by the US at a conference in Bretton Woods, New Hampshire in 1944, and ratified by the US Congress in 1945). It was similar to the gold exchange standard, but with the USD being the only “key currency,” priced at $35 an ounce of gold and being redeemable in gold only by foreign governments and central banks.
However, this system eventually met its end. The US inflated the USD and other governments held USD as reserves. Throughout the 1960s, the US expanded the money supply due to the “War on Poverty,” the Vietnam War, and space programs.
To finance all this, the US ran large budget deficits, with the Fed monetizing the debt. European countries such as Germany, Switzerland, France, and Italy began redeeming dollars for gold, and the system collapsed in 1968, ending fully in 1971 when Nixon suspended redemption.
The Closing of the Gold Window and the Rise of Fiat (1971–?)
In order to keep the redemption of the USD in gold, the US government had two options:
1. Cut spending and taxes to reduce the budget deficit, allowing the dollar to appreciate and restore gold parity.
2. Devalue the dollar, raising the price of gold to match increased money supply and prices.
Both options were politically difficult. In February 1973, after two devaluations that raised gold to $42.22 per ounce, the gold window was permanently closed. The USD returned to a floating exchange rate regime.
As a result, the USD devalued and the 1970s were marked by stagflation. In 1980, gold reached $850 per ounce, oil rose from under $3 to nearly $40, and inflation exceeded 14 percent.
Only in the early 1980s did inflation begin to decline after Paul Volcker raised interest rates to nearly 20 percent.
Conclusion
The consequences of the end of the gold standard began to be felt in the 1970s. The devaluation of the USD substantially reduced Americans’ real wages.
Before 1970, one income was often enough to support a family. After the 1970s, dual incomes became necessary, and today even that is often insufficient without debt.
Despite technological progress, the standard of living is argued to be lower than in the 1950s and 1960s in real terms. If the USD had not been devalued since 1913, living standards would likely be significantly higher today.
Last edited by MoneyMan
