The World Moves Off the Gold Standard



Aug 2, 2020
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Something odd occurred on August 15, 1971. That was the day President Richard Nixon moved the world off the gold standard. The dollar was no longer convertible for gold at a set price. The price of $35 per ounce. Because the price of gold had risen so much through the years and had gained a market value unto itself, I can only assume that the government wasn't very interested in letting it go for such a low price. From the point Nixon detached it from the dollar, both the dollar and gold were completely free floating. And since all the world's currencies were backed by the dollar, which used to be backed by gold, they were then only backed by the dollar, which was totally fiat. At that point, everything was fiat and gold was free to price itself at whatever the market deemed fit.

Two things happened when Nixon took the world off the gold standard; one, the Bretton Woods system failed and two, the United States essentially claimed bankruptcy. But since the U.S. Dollar was still used as the world's reserve currency, the rest of the world had nowhere to go, so they stayed put. There wasn't really any great alternative.

It was at that moment that the United States gained a tremendous advantage. Basically, the Federal Reserve could now print any amount of money and lend it to the U.S. government, which meant that congress and the president was able to maintain a standard of living for the population that far exceeded anything the people of the nation deserved. From that point on, budget and trade deficits was the norm. Even today, the practice of printing our way to prosperity continues. Just this very week, congress passed a stimulus package that exceeded $1.9 trillion. Each and every penny of that stimulus was borrowed and will eventually need to be paid back. Starting in 1971, the United States government began shedding any amount of fiscal conservation it ever had and that shedding has gotten worse every year thereafter. These days, there's not a shred left. While some in congress may claim that there's not enough money to go around, what they really mean is that there's not enough money to go around to fund their projects. Both parties love borrowing and spending. It's become a way of life.

Are you ready for an interesting phenomenon? We all know that the United States borrows money from whomever will lend it to them, whether it be the Federal Reserve, the citizens of the U.S. and those around the world, or other governments from various countries. When someone lends the U.S. government, say, $100, since the government borrows so much money through debt, it's essentially adding that debt (new money) to the monetary supply of the world, causing inflation. The Federal Reserve says that it's got a target inflation of 2% per year. What does that mean? It means that after you lend the U.S. government $100 one year, it inflates the currency to a point that you're only getting back $98 in value. Sure, you may actually get back more dollars than you invested because of interest, but in higher inflation periods, you'll receive less value. This is what people in the know call the "inflation tax." It's a hidden tax that very few people discuss, but it's a real force that eats away at your savings year in and year out. If you don't pay attention to it, it'll chew right through all the cash you've got in your very low yielding checking and savings accounts.

Interesting things happened when the dollar's link to gold was severed. Interesting things indeed. None of them great. I'll discuss all of these things in later posts.

This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney
The World Moves Off the Gold Standard was posted on 06-03-2021 by CaptainDan in the Economics Forum forum.

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