46 years ago, President Nixon delivered the final blow to what had been the remaining traces of a gold standard. Though abandoned 38 years earlier, in 1933, a key element of the standard nevertheless survived–convertibility of dollars to gold. The standard, in a sense, thus continued, albeit in modified form. But on August 15, 1971, that all changed.
Nixon suspended the limited convertibility of dollars into gold, a measure which was intended to be temporary. But this suspension, extended itself into permanence, as government realized the immense power that such a suspension granted. Government now had an unchallenged monopoly over the national currency. And the exercise of this power–the ability to control and manipulate a free floating currency toward the dubious horizon between experiment and abuse–has defined the monetary environment over the last 46 years.
Was this a successful experiment? With government’s unchecked capacity to control and even create money free of its gold shackles, what has government done in the years since 1971?
Here’s a picture illustrating one of the major effects it has had on the US economy:
The gold standard forces governments to live within their means. Without it, debt can spiral out of control. It’s analogous to someone making a purchase using a debit card versus a credit card.
Under a gold standard, government cannot spend more than the gold it has in its reserves, just as an individual’s spending via debit card would be limited to what he has in his bank account. WIthout a gold standard, government can inflate its money supply in order to further monetize debt. Of course, if an individual were to do the same–go into more and more debt using a credit card and create currency to pay for it–that would be an illegal act…counterfeiting.
Government conjures up a false sense of wealth and security in order to maintain its unrestrained capacity to monetize debt.
In a healthy economy with a stable currency, individuals have the option to invest in various enterprises. They may be able to afford taking market risks, as the economy is stable enough for investors to recoup any losses over time.
If the economy is not doing well, but the currency is trustworthy, then as the saying goes “cash is king.” People have the option to act as savers rather than investors.
Neither are valid options for Americans today.
Now if neither the economy nor the currency is doing well–which is the situation we are currently in–people will have to find a way to exit the government-controlled monetary system while maintaining a liquid means of exchange.
Buying precious metals has always stood as a reliable solution to protecting one’s prosperity. And now, cryptocurrencies have emerged as a secondary solution. Both also directly express a genuine lack of confidence in government to exercise its powers over currency.
46 years without gold. Ask yourself…honestly: are we really better off without it?