Gold Standard Guarantees Inflation
by Bill Haynes
recent weeks, as prices have surged higher, "revived"
inflation has become the topic du jour among establishment
writers. Unfortunately, these writers point to the usual suspects,
i.e. higher energy costs, higher interest rates, etc. In fact, the
cause of inflation is the United Statesí abandonment of the gold
United Statesí abandonment of gold as the foundation of its monetary
system came in two steps. In 1933, President Franklin Roosevelt
ended Americansí right to surrender paper dollars for gold and even
to own gold bullion. Step two came in 1971 when President Richard
Nixon "closed the gold window" and denied foreign governments
the right to turn in paper dollars for gold.
move was a major step in shifting the world from the gold standard
to the gold exchange standard. Under the gold standard,
governments fixed the prices of their currencies in terms of a specified
amount of gold and stood ready to convert their currencies into
gold at the fixed prices.
the gold exchange standard, governments could hold U.S. dollars
and British sterling as reserves because those currencies were "exchangeable
for gold." The move to the gold exchange standard became
official with the adoption of the 1944 Bretton Woods Agreement.
When Nixon closed the gold window, those nations counting paper
dollars as reserves found themselves holding paper instead of gold.
in 1974 President Gerald Ford signed legislation that permitted
Americans again to own gold bullion, that legislation did not put
the United States back on the gold standard.
the gold standard, a government is limited both legally and
practically as to how much paper money it can print. As recently
as the Lyndon Johnson administration, the U.S. could print paper
dollars equal only to four times the value of the nationís gold
the gold standard, governments that print too much paper
money risk runs on their gold reserves. Runs occur as holders of
the paper seek to convert to gold before the vaults are empty. A
run on the dollar is what happened in the late 1960s, which culminated
in President Richard Nixon closing the gold window in 1971.
the gold window" is a euphemism for the U.S. defaulting on
its promise to other countries to redeem dollars for gold. As an
alternative, Nixon could have devalued the dollar and continued
to redeem. In effect, he chose a one hundred percent devaluation,
a de facto default on the promise to redeem.
the 34 years before Nixon closed the gold window, the money supply
in the U.S. grew less than two fold. In the 34 years after Nixonís
action, the money supply expanded 13 fold. The Fedís massive inflation
of the 1990s resulted in the greatest advance in stock market history.
Continued inflation is now pushing housing prices to record levels.
Automobiles now cost more than houses did only thirty years ago.
establishment assertions that the dollar is "sound," investors
should prepare for further declines in the value of the dollar and
plan their investments accordingly. History shows that no government,
after going on a fiat monetary system, ever reverses course
until its paper currency is destroyed. There is no reason to believe
this time will be any different.
Haynes [send him mail] holds a
BS in Finance from the University of Colorado and has been a gold
bullion dealer since 1973. Bill starts his day reading LewRockwell.comís
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