the current monetary chaos, it is necessary to trace briefly the
international monetary developments of the 20th century, and to
see how each set of unsound inflationist interventions has collapsed
of its own inherent problems, only to set the stage for another
round of interventions. The 20th-century history of the world
monetary order can be divided into nine phases. Let us examine
each in turn.
The Classical Gold Standard, 1815–1914
We can look
back upon the "classical" gold standard, the Western
world of the 19th and early 20th centuries, as the literal and
metaphorical Golden Age. With the exception of the troublesome
problem of silver, the world was on a gold standard, which meant
that each national currency (the dollar, pound, franc, etc.) was
merely a name for a certain definite weight of gold.
The "dollar," for example, was defined as 1/20 of a
gold ounce, the pound sterling as slightly less than 1/4 of a
gold ounce, and so on. This meant that the "exchange rates"
between the various national currencies were fixed, not because
they were arbitrarily controlled by government, but in the same
way that one pound of weight is defined as being equal to sixteen
gold standard meant that the benefits of having one money medium
were extended throughout the world. One of the reasons for the growth
and prosperity of the United States has been the fact that we have
enjoyed one money throughout the large area of the country.
We have had a gold or at least a single dollar standard within the
entire country, and did not have to suffer the chaos of each city
and county issuing its own money, which would then fluctuate with
respect to the moneys of all the other cities and counties. The
19th century saw the benefits of one money throughout the civilized
world. One money facilitated freedom of trade, investment, and travel
throughout that trading and monetary area, with the consequent growth
of specialization and the international division of labor.
It must be
emphasized that gold was not selected arbitrarily by governments
to be the monetary standard. Gold had developed for many centuries
on the free market as the best money; as the commodity providing
the most stable and desirable monetary medium. Above all, the
supply and provision of gold was subject only to market forces,
and not to the arbitrary printing press of the government.
gold standard provided an automatic market mechanism for checking
the inflationary potential of government. It also provided an
automatic mechanism for keeping the balance of payments of each
country in equilibrium. As the philosopher and economist David
Hume pointed out in the mid-18th century, if one nation, say France,
inflates its supply of paper francs, its prices rise; the increasing
incomes in paper francs stimulate imports from abroad, which are
also spurred by the fact that prices of imports are now relatively
cheaper than prices at home.
At the same
time, the higher prices at home discourage exports abroad; the
result is a deficit in the balance of payments, which must be
paid for by foreign countries cashing in francs for gold. The
gold outflow means that France must eventually contract its inflated
paper francs in order to prevent a loss of all of its gold. If
the inflation has taken the form of bank deposits, then the French
banks have to contract their loans and deposits in order to avoid
bankruptcy as foreigners call upon the French banks to redeem
their deposits in gold. The contraction lowers prices at home,
and generates an export surplus, thereby reversing the gold outflow
until the price levels are equalized in France and in other countries
It is true
that the interventions of governments previous to the 19th century
weakened the speed of this market mechanism, and allowed for a business
cycle of inflation and recession within this gold-standard framework.
These interventions were particularly: the governments’ monopolizing
of the mint, legal tender laws, the creation of paper money, and
the development of inflationary banking propelled by each of the
governments. But while these interventions slowed the adjustments
of the market, these adjustments were still in ultimate control
of the situation. So while the classical gold standard of the 19th
century was not perfect, and allowed for relatively minor booms
and busts, it still provided us with by far the best monetary order
the world has ever known, an order which worked, which kept business
cycles from getting out of hand, and which enabled the development
of free international trade, exchange, and investment.
World War I and After
If the classical
gold standard worked so well, why did it break down? It broke
down because governments were entrusted with the task of keeping
their monetary promises, of seeing to it that pounds, dollars,
francs, etc., were always redeemable in gold as they and their
controlled banking system had pledged. It was not gold that failed;
it was the folly of trusting government to keep its promises.
To wage the catastrophic war of World War I, each government had
to inflate its own supply of paper and bank currency. So severe
was this inflation that it was impossible for the warring governments
to keep their pledges, and so they went "off the gold standard,"
i.e., declared their own bankruptcy, shortly after entering the
war. All except the United States, which entered the war late,
and did not inflate the supply of dollars enough to endanger redeemability.
from the United States, the world suffered what some economists
now hail as the Nirvana of freely-fluctuating exchange rates (now
called "dirty floats"), competitive devaluations, warring
currency blocs, exchange controls, tariffs and quotas, and the
breakdown of international trade and investment. The inflated
pounds, francs, marks, etc., depreciated in relation to gold and
the dollar; monetary chaos abounded throughout the world.
days there were, happily, very few economists to hail this situation
as the monetary ideal. It was generally recognized that phase
II was the threshold to international disaster, and politicians
and economists looked around for ways to restore the stability
and freedom of the classical gold standard.
The Gold-Exchange Standard (Britain and the United States) 1926–1931
How to return
to the Golden Age? The sensible thing to do would have been to
recognize the facts of reality, the fact of the depreciated pound,
franc, mark, etc., and to return to the gold standard at a redefined
rate: a rate that would recognize the existing supply of money
and price levels. The British pound, for example, had been traditionally
defined at a weight which made it equal to $4.86. But by the end
of World War I, the inflation in Britain had brought the pound
down to approximately $3.50 on the free foreign-exchange market.
Other currencies were similarly depreciated. The sensible policy
would have been for Britain to return to gold at approximately
$3.50, and for the other inflated countries to do the same. Phase
I could have been smoothly and rapidly restored. Instead, the
British made the fateful decision to return to gold at the old
par of $4.86.
so for reasons of British national "prestige," and in
a vain attempt to reestablish London as the "hard money"
financial center of the world. To succeed at this piece of heroic
folly, Britain would have had to deflate severely its money supply
and its price levels, for at a $4.86 pound British export prices
were far too high to be competitive in the world markets. But
deflation was now politically out of the question, for the growth
of trade unions, buttressed by a nationwide system of unemployment
insurance, had made wage rates rigid downward; in order to deflate,
the British government would have had to reverse the growth of
its welfare state. In fact, the British wished to continue to
inflate money and prices. As a result of combining inflation with
a return to an overvalued par, British exports were depressed
all during the 1920s and unemployment was severe all during the
period when most of the world was experiencing an economic boom.
the British try to have their cake and eat it at the same time?
By establishing a new international monetary order which would
induce or coerce other governments into inflating or into
going back to gold at overvalued pars for their own currencies,
thus crippling their own exports and subsidizing imports from
Britain. This is precisely what Britain did, as it led the way,
at the Genoa Conference of 1922, in creating a new international
monetary order, the gold-exchange standard.
standard worked as follows: The United States remained on the classical
gold standard, redeeming dollars in gold. Britain and the other
countries of the West, however, returned to a pseudo-gold standard,
Britain in 1926 and the other countries around the same time. British
pounds and other currencies were not payable in gold coins, but
only in large-sized bars, suitable only for international transactions.
This prevented the ordinary citizens of Britain and other European
countries from using gold in their daily life, and thus permitted
a wider degree of paper and bank inflation. But furthermore, Britain
redeemed pounds not merely in gold, but also in dollars; while the
other countries redeemed their currencies not in gold, but in pounds.
And most of these countries were induced by Britain to return to
gold at overvalued parities. The result was a pyramiding of United
States on gold, of British pounds on dollars, and of other European
currencies on pounds – the "gold-exchange standard,"
with the dollar and the pound as the two "key currencies."
Now when Britain
inflated, and experienced a deficit in its balance of payments,
the gold-standard mechanism did not work to quickly restrict British
inflation. For instead of other countries redeeming their pounds
for gold, they kept the pounds and inflated on top of them. Hence
Britain and Europe were permitted to inflate unchecked, and British
deficits could pile up unrestrained by the market discipline of
the gold standard. As for the United States, 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.
of the gold-exchange standard is that it cannot last; the piper
must eventually be paid, but only in a disastrous reaction to
the lengthy inflationary boom. As sterling balances piled up in
France, the United States, and elsewhere, the slightest loss of
confidence in the increasingly shaky and jerry-built 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
Fluctuating Fiat Currencies, 1931–1945
was now back to the monetary chaos of World War I, except that
now there seemed to be little hope for a restoration of gold.
The international economic order had disintegrated into the chaos
of clean and dirty floating exchange rates, competing devaluations,
exchange controls, and trade barriers; international economic
and monetary warfare raged between currencies and currency blocs.
International trade and investment came to a virtual standstill;
and trade was conducted through barter agreements conducted by
governments competing and conflicting with one another. Secretary
of State Cordell Hull repeatedly pointed out that these monetary
and economic conflicts of the 1930s were the major cause of World
States remained on the gold standard for two years, and then,
in 1933–1934, went off the classical gold standard in a vain
attempt to get out of the depression. American citizens could
no longer redeem dollars in gold, and were even prohibited from
owning any gold, either here or abroad. But the United States
remained, after 1934, on a peculiar new form of gold standard,
in which the dollar, now redefined to 1/35 of a gold ounce, was
redeemable in gold to foreign governments and central banks. A
lingering tie to gold remained. Furthermore, the monetary chaos
in Europe led to gold flowing into the only relatively safe monetary
haven, the United States.
The chaos and
the unbridled economic warfare of the 1930s points up an important
lesson: the grievous political flaw (apart from the economic
problems) in the Milton Friedman–Chicago School monetary scheme
for freely-fluctuating fiat currencies. For what the Friedmanites
would do – in the name of the free market – is
to cut all ties to gold completely, leave the absolute control of
each national currency in the hands of its central government issuing
fiat paper as legal tender – and then advise each government
to allow its currency to fluctuate freely with respect to all other
fiat currencies, as well as to refrain from inflating its currency
too outrageously. The grave political flaw is to hand total control
of the money supply to the Nation-State, and then to hope and expect
that the State will refrain from using that power. And since power
always tends to be used, including the power to counterfeit legally,
the navet, as well as the statist nature, of this type of program
should be starkly evident.
And so, the
disastrous experience of phase IV, the 1930s world of fiat paper
and economic warfare, led the US authorities to adopt as their
major economic war aim of World War II the restoration of a viable
international monetary order, an order on which could be built
a renaissance of world trade and the fruits of the international
division of labor.
Bretton Woods and the New Gold-Exchange Standard (the United States)
The new international
monetary order was conceived and then driven through by the United
States at an international monetary conference at Bretton Woods,
New Hampshire, in mid-1944, and ratified by the Congress in July,
1945. While the Bretton Woods system worked far better than the
disaster of the 1930s, it worked only as another inflationary
recrudescence of the gold-exchange standard of the 1920s and –
like the 1920s – the system lived only on borrowed time.
The new system
was essentially the gold-exchange standard of the 1920s but with
the dollar rudely displacing the British pound as one of the "key
currencies." Now the dollar, valued at 1/35 of a gold ounce,
was to be the only key currency. The other difference from
the 1920s was that the dollar was no longer redeemable in gold
to American citizens; instead, the 1930’s system was continued,
with the dollar redeemable in gold only to foreign governments
and their central banks. No private individuals, only governments,
were to be allowed the privilege of redeeming dollars in the world
the Bretton Woods system, the United States pyramided dollars (in
paper money and in bank deposits) on top of gold, in which dollars
could be redeemed by foreign governments; while all other governments
held dollars as their basic reserve and pyramided their currency
on top of dollars. And since the United States began the postwar
world with a huge stock of gold (approximately $25 billion) there
was plenty of play for pyramiding dollar claims on top of it. Furthermore,
the system could "work" for a while because all the world’s
currencies returned to the new system at their pre-World War II
pars, most of which were highly overvalued in terms of their inflated
and depreciated currencies. The inflated pound sterling, for example,
returned at $4.86, even though it was worth far less than that in
terms of purchasing power on the market. Since the dollar was artificially
undervalued and most other currencies overvalued in 1945, the dollar
was made scarce, and the world suffered from a so-called dollar
shortage, which the American taxpayer was supposed to be obligated
to make up by foreign aid. In short, the export surplus enjoyed
by the undervalued American dollar was to be partly financed by
the hapless American taxpayer in the form of foreign aid.
plenty of room for inflation before retribution could set in,
the US government embarked on its postwar policy of continual
monetary inflation, a policy it has pursued merrily ever since.
By the early 1950s, the continuing American inflation began to
turn the tide of international trade. For while the United States
was inflating and expanding money and credit, the major European
governments, many of them influenced by "Austrian" monetary
advisers, pursued a relatively "hard money" policy (e.g.,
West Germany, Switzerland, France, Italy). Steeply inflationist
Britain was compelled by its outflow of dollars to devalue the
pound to more realistic levels (for a while it was approximately
combined with the increasing productivity of Europe, and later
Japan, led to continuing balance-of-payments deficits with the
United States. As the 1950s and 1960s wore on, the United States
became more and more inflationist, both absolutely and relatively
to Japan and Western Europe. But the classical gold-standard check
on inflation – especially American inflation –
was gone. For the rules of the Bretton Woods game provided that
the West European countries had to keep piling up their reserve,
and even use these dollars as a base to inflate their own currency
But as the
1950s and 1960s continued, the harder-money countries of West Europe
(and Japan) became restless at being forced to pile up dollars that
were now increasingly overvalued instead of undervalued. As the
purchasing power and hence the true value of dollars fell, they
became increasingly unwanted by foreign governments. But they were
locked into a system that was more and more of a nightmare. The
American reaction to the European complaints, headed by France and
DeGaulle’s major monetary adviser, the classical gold-standard economist
Jacques Rueff, was merely scorn and brusque dismissal. American
politicians and economists simply declared that Europe was forced
to use the dollar as its currency, that it could do nothing about
its growing problems, and therefore the United States could keep
blithely inflating while pursuing a policy of "benign neglect"
toward the international monetary consequences of its own actions.
did have the legal option of redeeming dollars in gold at $35
an ounce. And as the dollar became increasingly overvalued in
terms of hard money currencies and gold, European governments
began more and more to exercise that option. The gold-standard
check was coming into use; hence gold flowed steadily out of the
United States for two decades after the early 1950s, until the
US gold stock dwindled over this period from over $20 billion
to $9 billion. As dollars kept inflating upon a dwindling gold
base, how could the United States keep redeeming foreign dollars
in gold – the cornerstone of the Bretton Woods system?
did not slow down continued US inflation of dollars and prices,
nor the United States policy of "benign neglect," which
resulted by the late 1960s in an accelerated pileup of no less
than $80 billion in unwanted dollars in Europe (known as Eurodollars).
To try to stop European redemption of dollars into gold, the United
States exerted intense political pressure on the European governments,
similar but on a far larger scale to the British cajoling of France
not to redeem its heavy sterling balances until 1931. But economic
law has a way, at long last, of catching up with governments,
and this is what happened to the inflation-happy US government
by the end of the 1960s. The gold-exchange system of Bretton Woods
– hailed by the US political and economic establishment as
permanent and impregnable – began to unravel rapidly in 1968.
The Unraveling of Bretton Woods, 1968–1971
piled up abroad and gold continued to flow outward, the United
States found it increasingly difficult to maintain the price of
gold at $35 an ounce in the free gold markets at London and Zurich.
Thirty-five dollars an ounce was the keystone of the system, and
while American citizens have been barred since 1934 from owning
gold anywhere in the world, other citizens have enjoyed the freedom
to own gold bullion and coin. Hence, one way for individual Europeans
to redeem their dollars in gold was to sell their dollars for
gold at $35 an ounce in the free gold market. As the dollar kept
inflating and depreciating, and as American balance-of-payments
deficits continued, Europeans and other private citizens began
to accelerate their sales of dollars into gold. In order to keep
the dollar at $35 an ounce, the US government was forced to leak
out gold from its dwindling stock to support the $35 price at
London and Zurich.
of confidence in the dollar on the free gold markets led the United
States to effect a fundamental change in the monetary system in
March 1968. The idea was to stop the pesky free gold market from
ever again endangering the Bretton Woods arrangement. Hence was
born the "two-tier gold market." The idea was that the
free gold market could go to blazes; it would be strictly insulated
from the real monetary action in the central banks and
governments of the world. The United States would no longer try
to keep the free-market gold price at $35; it would ignore the
free gold market, and it and all the other governments agreed
to keep the value of the dollar at $35 an ounce forevermore.
and central banks of the world would henceforth buy no more gold
from the "outside" market and would sell no more gold
to that market; from now on gold would simply move as counters
from one central bank to another, and new gold supplies, free
gold market, or private demand for gold would take their own course
completely separated from the monetary arrangements of the world.
this, the United States pushed hard for the new launching of a
new kind of world paper reserve, Special Drawing Rights (SDRs),
which it was hoped would eventually replace gold altogether and
serve as a new world paper currency to be issued by a future World
Reserve Bank; if such a system were ever established, then the
United States could inflate unchecked forevermore, in collaboration
with other world governments (the only limit would then be the
disastrous one of a worldwide runaway inflation and the crackup
of the world paper currency). But the SDRs, combatted intensely
as they have been by Western Europe and the "hard-money"
countries, have so far been only a small supplement to American
and other currency reserves.
economists, from Keynesians to Friedmanites, were now confident
that gold would disappear from the international monetary system;
cut off from its "support" by the dollar, these economists
all confidently predicted, the free-market gold price would soon
fall below $35 an ounce, and even down to the estimated "industrial"
nonmonetary gold price of $10 an ounce. Instead, the free price
of gold, never below $35, had been steadily above $35, and by
early 1973 had climbed to around $125 an ounce, a figure that
no pro-paper economist would have thought possible as recently
as a year earlier.
establishing a permanent new monetary system, the two-tier gold
market only bought a few years of time; American inflation and
deficits continued. Eurodollars accumulated rapidly, gold continued
to flow outward, and the higher free-market price of gold simply
revealed the accelerated loss of world confidence in the dollar.
The two-tier system moved rapidly toward crisis – and to
the final dissolution of Bretton Woods.
The End of Bretton Woods: Fluctuating Fiat Currencies, August–December
15, 1971, at the same time that President Nixon imposed a price-wage
freeze in a vain attempt to check bounding inflation, Mr. Nixon
also brought the postwar Bretton Woods system to a crashing end.
As European central banks at last threatened to redeem much of
their swollen stock of dollars for gold, President Nixon went
totally off gold. For the first time in American history, the
dollar was totally fiat, totally without backing in gold. Even
the tenuous link with gold maintained since 1933 was now severed.
The world was plunged into the fiat system of the 1930s –
and worse, since now even the dollar was no longer linked to gold.
Ahead loomed the dread spectre of currency blocs, competing devaluations,
economic warfare, and the breakdown of international trade and
investment, with the worldwide depression that would then ensue.
What to do?
Attempting to restore an international monetary order lacking
a link to gold, the United States led the world into the Smithsonian
Agreement on December 18, 1971.
The Smithsonian Agreement, December 1971–February 1973
Agreement, hailed by President Nixon as the "greatest monetary
agreement in the history of the world," was even more shaky
and unsound than the gold-exchange standard of the 1920s or than
Bretton Woods. For once again, the countries of the world pledged
to maintain fixed exchange rates, but this time with no gold or
world money to give any currency backing. Furthermore, many European
currencies were fixed at undervalued parities in relation to the
dollar; the only US concession was a puny devaluation of the official
dollar rate to $38 an ounce. But while much too little and too late,
this devaluation was significant in violating an endless round of
official American pronouncements, which had pledged to maintain
the $35 rate forevermore. Now at last the $35 price was implicitly
acknowledged as not graven on tablets of stone.
It was inevitable
that fixed exchange rates, even with wider agreed zones of fluctuation,
but lacking a world medium of exchange, were doomed to rapid defeat.
This was especially true since American inflation of money and
prices, the decline of the dollar, and balance-of-payments deficits
supply of Eurodollars, combined with the continued inflation and
the removal of gold backing, drove the free-market gold price
up to $215 an ounce. And as the overvaluation of the dollar and
the undervaluation of European and Japanese hard money became
increasingly evident, the dollar finally broke apart on the world
markets in the panic months of February–March 1973. It became
impossible for West Germany, Switzerland, France and the other
hard money countries to continue to buy dollars in order to support
the dollar at an overvalued rate. In little over a year, the Smithsonian
system of fixed exchange rates without gold had smashed apart
on the rocks of economic reality.
Fluctuating Fiat Currencies, March 1973–?
dollar breaking apart, the world shifted again, to a system of
fluctuating fiat currencies. Within the West European bloc, exchange
rates were tied to one another, and the United States again devalued
the official dollar rate by a token amount to $42 an ounce. As
the dollar plunged in foreign exchange from day to day, and the
West German mark, the Swiss franc, and the Japanese yen hurtled
upward, the American authorities, backed by the Friedmanite economists,
began to think that this was the monetary ideal. It is true that
dollar surpluses and sudden balance-of-payments crises do not
plague the world under fluctuating exchange rates. Furthermore,
American export firms began to chortle that falling dollar rates
made American goods cheaper abroad, and therefore benefitted exports.
It is true that governments persisted in interfering with exchange
fluctuations ("dirty" instead of "clean" floats),
but overall it seemed that the international monetary order had
sundered into a Friedmanite utopia.
But it became
clear all too soon that all is far from well in the current international
monetary system. The long-run problem is that the hard-money countries
will not sit by forever and watch their currencies become more
expensive and their exports hurt for the benefit of their American
competitors. If American inflation and dollar depreciation continues,
they will soon shift to the competing devaluation, exchange controls,
currency blocs, and economic warfare of the 1930s.
immediate is the other side of the coin: the fact that depreciating
dollars means that American imports are far more expensive, American
tourists suffer abroad, and cheap exports are snapped up by foreign
countries so rapidly as to raise prices of exports at home (e.g.,
the American wheat-and-meat price inflation). So that American
exporters might indeed benefit, but only at the expense of the
inflation-ridden American consumer. The crippling uncertainty
of rapid exchange-rate fluctuations was brought starkly home to
Americans with the rapid plunge of the dollar in foreign-exchange
markets in July 1973.
United States went completely off gold in August 1971 and established
the Friedmanite fluctuating fiat system in March 1973, the United
States and the world have suffered the most intense and most sustained
bout of peacetime inflation in the history of the world. It should
be clear by now that this is scarcely a coincidence. Before the
dollar was cut loose from gold, Keynesians and Friedmanites, each
in their own way devoted to fiat paper money, confidently predicted
that when fiat money was established, the market price of gold
would fall promptly to its nonmonetary level, then estimated at
about $8 an ounce.
scorn of gold, both groups maintained that it was the mighty dollar
that was propping up the price of gold, and not vice versa. Since
1971, the market price of gold has never been below the old fixed
price of $35 an ounce, and has almost always been enormously higher.
When, during the 1950s and 1960s, economists such as Jacques Rueff
were calling for a gold standard at a price of $70 an ounce, the
price was considered absurdly high. It is now even more absurdly
low. The far higher gold price is an indication of the calamitous
deterioration of the dollar since "modern" economists
had their way and all gold backing was removed.
It is now
all too clear that the world has become fed up with the unprecedented
inflation, in the United States and throughout the world, that
has been sparked by the fluctuating fiat currency era inaugurated
in 1973. We are also weary of the extreme volatility and unpredictability
of currency exchange rates. This volatility is the consequence
of the national fiat-money system, which fragmented the world’s
money and added artificial political instability to the natural
uncertainty in the free-market price system. The Friedmanite dream
of fluctuating fiat money lies in ashes, and there is an understandable
yearning to return to an international money with fixed exchange
the classical gold standard lies forgotten, and the ultimate goal
of most American and world leaders is the old Keynesian vision
of a one-world fiat paper standard, a new currency unit issued
by a World Reserve Bank (WRB). Whether the new currency be termed
"the bancor" (offered by Keynes), the "unita"
(proposed by World War II US Treasury official Harry Dexter White),
or the "phoenix" (suggested by The Economist)
is unimportant. The vital point is that such an international
paper currency, while indeed free of balance-of-payments crises
(since the WRB could issue as much bancors as it wished and supply
them to its country of choice), would provide for an open channel
for unlimited world-wide inflation, unchecked by either balance-of-payments
crises or by declines in exchange rates.
The WRB would
then be the all-powerful determinant of the world’s money supply
and its national distribution. The WRB could and would subject
the world to what it believes will be a wisely-controlled inflation.
Unfortunately, there would then be nothing standing in the way
of the unimaginably catastrophic economic holocaust of world-wide
runaway inflation, nothing, that is, except the dubious capacity
of the WRB to fine-tune the world economy.
While a world-wide
paper unit and central bank remain the ultimate goal of world’s
Keynesian-oriented leaders, the more realistic and proximate goal
is a return to a glorified Bretton Woods scheme, except this time
without the check of any backing in gold. Already the world’s major
central banks are attempting to "coordinate" monetary
and economic policies, harmonize rates of inflation, and fix exchange
rates. The militant drive for a European paper currency issued by
a European central bank seems on the verge of success. This goal
is being sold to the gullible public by the fallacious claim that
a free-trade European Economic Community (EEC) necessarily requires
an overarching European bureaucracy, a uniformity of taxation throughout
the EEC, and, in particular, a European central bank and paper unit.
Once that is achieved, closer coordination with the Federal Reserve
and other major central banks will follow immediately. And then,
could a World Central Bank be far behind? Short of that ultimate
goal, however, we may soon be plunged into yet another Bretton Woods,
with all the attendant crises of the balance of payments and Gresham’s
Law that follow from fixed exchange rates in a world of fiat moneys.
we face the future, the prognosis for the dollar and for the international
monetary system is grim indeed. Until and unless we return to the
classical gold standard at a realistic gold price, the international
money system is fated to shift back and forth between fixed and
fluctuating exchange rates with each system posing unsolved problems,
working badly, and finally disintegrating. And fueling this disintegration
will be the continued inflation of the supply of dollars and hence
of American prices which show no sign of abating. The prospect for
the future is accelerating and eventually runaway inflation at home,
accompanied by monetary breakdown and economic warfare abroad. This
prognosis can only be changed by a drastic alteration of the American
and world monetary system: by the return to a free market commodity
money such as gold, and by removing government totally from the
For a recent study of the classical gold standard, and a history
of the early phases of its breakdown in the 20th century, see
Melchior Palyi, The Twilight of Gold, 1914–1936 (Chicago:
Henry Regnery, 1972).
On the crucial British error and its consequence in leading
to the 1929 depression, see Lionel Robbins, The Great Depression
(New York: Macmillan, 1934).
Cordell Hull, Memoirs (New York, 1948), vol. I, p. 81.
Also see Richard N. Gardner, Sterling-Dollar Conspiracy
(Oxford: Clarendon Press, 1956), p. 141.
On the two-tier gold market, see Jacques Rueff, The Monetary
Sin of the West (New York: Macmillan, 1972).
N. Rothbard (1926–1995) was dean of the Austrian
School, founder of modern libertarianism, and academic vice
president of the Mises Institute.
He was also editor — with Lew Rockwell — of The
Rothbard-Rockwell Report, and appointed Lew as his
literary executor. See