What Happened to the Gold Standard?
In 1971, the United States significantly shifted its monetary policy by abandoning the gold standard. This decision, known as the “Nixon Shock,” was a turning point in the nation’s economic history and has had lasting effects on the global financial system.
The gold standard, which had been in place in various forms since the 19th century, tied the value of the US dollar to a specific amount of gold. This system ensured that the currency had a tangible backing, providing stability and confidence in its value. The Bretton Woods Agreement, established in 1944, further solidified the gold standard’s role in the international monetary system by pegging other currencies to the US dollar, which was convertible into gold.
By the late 1960s, however, the US faced mounting economic challenges. The costs of the Vietnam War and President Lyndon B. Johnson’s Great Society programs had led to significant budget deficits. The government was trying to spend money that it did not have. Additionally, other countries were beginning to question the stability of the US dollar and started redeeming their dollars for gold. This put immense pressure on the US gold reserves, which were rapidly dwindling.
In response to these pressures, President Richard Nixon announced on August 15, 1971, that the US would no longer convert dollars into gold. This decision effectively ended the Bretton Woods system. It marked the beginning of a new era of fiat currency, where the value of money is not tied to any physical commodity but is instead based on government decree.
The Consequences of Abandoning the Gold Standard
The transition to fiat currency had significant implications for the US and the global economy. Without the constraints of the gold standard, the US government gained greater flexibility in its monetary policy. This allowed for more aggressive measures to manage economic cycles, such as adjusting interest rates and controlling the money supply. This control allowed the government to spend money without having to back it up with physical gold. Gold no longer needed to be available for foreign entities that wanted to trade their dollars for gold. If the government needed money, they could create it out of thin air.
However, this newfound flexibility came with obvious problems. The absence of a tangible backing for the currency opened the door to fiscal irresponsibility. The US national debt began to soar, and the government increasingly relied on printing money to finance its expenditures. This led to a devaluation of the dollar and a loss of purchasing power for ordinary citizens. Since 1971, on average, prices have increased by approximately 632%. In other words, what cost $1 in 1971 would now cost around $7.32. Just since 2020, costs have increased by 22.8%. This is all based on the assumption that the Consumer Price Index is accurate. There are many reasons to believe that the percentages are incorrect based on biased ways of reporting price increases.
According to the Shadow Government Statistics (SGS) Alternate CPI, which uses methodologies from before the 1980s and 1990s changes to the official CPI calculation, the inflation rate would be significantly higher than the official CPI. While the official CPI might report an inflation rate of around 85-86% since 1971, the SGS Alternate CPI indicates that if inflation were calculated using the pre-1980 methodology, the cumulative inflation rate since 1971 would be around 1,000%. Regardless of the methodology, the point is this: the dollar has and continues to lose value rapidly.
Inflation became a persistent issue, eroding the value of savings and disproportionately affecting those with fixed incomes. The centralization of monetary control in the hands of policymakers, particularly the Federal Reserve, also concentrated economic power and introduced the risk of policy errors and market distortions.
A Call for Sound Money
The abandonment of the gold standard marked a significant departure from sound monetary principles. This move has led to fiscal irresponsibility, inflation, and the centralization of power. A return to a system of sound money, backed by tangible assets like gold or silver, would restore economic stability and safeguard individual freedoms in the face of an increasingly interventionist monetary policy.
Unfortunately, we cannot control what the government does with our money alone. However, we can implement the same principles that we want the government to implement. Instead of relying solely on Fiat currency, we can back our wealth by investing in gold and silver. The price of gold has increased by approximately 8,300% since 1971. This is why gold is the best way to avoid the adverse effects of inflation.
