History of the Gold Standard (w/ Grant Williams)


GRANT WILLIAMS: This idea of the preservation of
purchasing power is central to the notion of buying gold as a store of
wealth. And it’s been a proven strategy which has transcended
history. As mankind has debased hundreds of paper currencies over
the centuries, gold has remained as the anchor at the heart of the
financial system. And the reasons for that are the unique properties which
made it money in the first place. Gold’s durability, portability, fungibility, and
divisibility have combined to make sure that it’s maintained its purchasing power, outlasting
every fear alternative for almost 6000 years. Through booms and busts, through war and famine and
through mankind’s constant ability to debauch undervalue fiat alternatives. While the dollar
has been the world’s reserve currency for 40 years, that hasn’t always been the case. The
British pound, the Spanish peseta, and even the Portuguese escudo at one point in history were all as
mighty in their time as the dollar is today. Throughout history, the civilizations needed to finance
expansion, they were constrained by their gold reserves. The Romans physically clip their coins with using the
amount of gold and silver, and thereby reducing the wages paid to their armies, until such point
that the soldiers refused to fight. For the majority of the last 200 years, the world has been
on a gold standard of some sort. But we live in the first period in recorded history of a
purely fiat currency regime. That regime began when Richard Nixon broke the dollar’s
linked to gold in 1971. Today, the absence of any link to gold has allowed
governments to increase debt to completely unsustainable levels. When
society can no longer service this ever-expanding debt mountain, a return to a gold standard
of some sort is almost inevitable. We’ve all lived in a purely fiat monetary system since
Richard Nixon’s supposedly temporary suspension of the dollar’s convertibility into gold. And because of
that, the idea of a return to a gold standard of some sort is seen as both unthinkable and unworkable. The gold standard has been blamed for the Great
Depression. And many prominent politicians and economists have claimed that a gold standard will be impossible in today’s world. The question is why? What was the gold standard? And why does the very idea of its reinstatement stir up
such passion in the hallowed halls of governments and central banks? JAMES RICKARDS: We had no Central Bank from 1836 to 1913. That was one of the greatest periods of prosperity in
world history. Forget American history- invention, the telephone, the
Reaper, the airplane, radio, phonograph, massive increase, electricity, massive increases in productivity,
great industrial successes, Andrew Carnegie. So, America grew like crazy with no Central Bank. First of all, it’s voluntary, you as a nation could choose
to be on it or not. A lot of countries found it in their interest to do so. And all you had to do is okay, we print money, we have
this paper money, but it’s redeemable for gold at a fixed rate. And you declare that that was your policy and you stayed
with it. Now, if a whole bunch of currencies are convertible to
gold at a fixed rate, then to a simple transitive law, they’re convertible into
each other at a fixed rate. And that was how the world work. Again, with no guidance
from bureaucrats. And if you ran a trade deficit, you had to pay for that in
gold. But what happened when you had to pay for that in gold, where you were decreasing your money supply that was
deflationary, prices went down, wages might have gone down for that matter. But that made
you more competitive. And then you would come back to a trade surplus because
they will send you the cheap provider. Likewise, if you were running a trade surplus, and you
were getting all this gold, what happened? Your money supply increase. That was inflationary, your
prices went up, you were less competitive. So, this was a self-equilibrating system. RICK RULE: The gold standard was a method that tied the
political classes and the voter to reality with regards to the construction of an economy untied to
arithmetic. RONALD-PETER STOEFERLE: We’ve had a number of occasions
when a gold standard basically broke down, but it was never because of the system, never because of
the golds. It’s always been because of politicians breaking the gold
standard. RICK RULE: The gold standard didn’t work because it didn’t
allow the spenders to plunder the savers. The politicians were of course instrumental in debt. It wouldn’t work today because the political class doesn’t
want any part of the system that constraints their power. DANIEL OLIVER: There was an article, an editorial in New
York Times actually that they point in the ’50s, pointed out that it didn’t
fail, it was killed. It was killed by the Allied Powers because they wanted to
fight war. Before World War I broke out, the consensus was- the general consensus was the war couldn’t last more than
a few months. Because there was certainly wasn’t enough money for the
governments to fight that war, and of course, that view, didn’t understand the first
thing governments would do was cancel the right of redemption and print the money to
fight that war. JAMES RICKARDS: There were five people in the room at Camp
David that weekend. It was August 15, 1971, Richard Nixon went up to Camp
David with his economic team. It was Paul Volcker who was a Deputy Secretary of the
Treasury at the time, Arthur Burns who was chairman of the Fed. John Connally was Secretary of the Treasury, President
Nixon, and there was a fifth man. And for many years, I never knew who the fifth man was, I
couldn’t figure it out. Turned out to be a friend of mine. Kenneth Dam was the dean Emeritus of the University
Chicago Law School. I spoke to Volker, I spoke to Ken Dam. So, I spoke to two of the five people who were there, most
of all with the decision. And they all told me the same thing, which is, they really
thought it was temporary. GRANT WILLIAMS: So, a monetary system, which had endured
for thousands of years, was terminated by the stroke of a president’s pen. But
what changed when Nixon shut the gold window, removing the dollar’s anchor, and how has that affected
the way we think of money today? LUKE GROMEN: The world changed tremendously after Nixon
close the gold window up until that point, effectively. In the immediate
aftermath of World War II, you had the Bretton Woods system where the dollar was tied
to gold at $35 an ounce and the rest of the world’s currencies were tied to the
dollar. And so, what you had was a system where the dollar was
effectively as good as gold. DAVID FERGUSON: They shot the gold window, they thought,
well, let’s get ready to reopen it tomorrow. And see just in case everyone sort of- there’s a run on the dollar or the people lose confidence
in the monetary system, let’s get ready to reopen the window pretty much
immediately. So, really, it was sending up a balloon. Let’s try this
policy, because we’ve really run out of money. And the other option is to actually run a much tighter
fiscal system. So, it wasn’t the actual fact of closing the window that
changed anything. It was the fact that everybody else accepted it. Right? If everybody had said, what unit, dollar piece of paper,
forget it, no. And the dollar collapsed, or people start to accept the
treasury bills, then we’d still have the gold standard. But it’s the
apathy of the general population at large, that caused or that allowed Nixon to get away with this
change? RICK RULE: If you think back to 1971 and decide whether on
a global basis more people trusted Nixon or more people trusted gold, the circumstance where gold
rose in dollar terms from $35 to $850 tells you something about the franchise enjoyed by Nixon
and the franchise enjoyed by gold. So, what really happened to gold? Nothing. What happened to the US dollar in the ensuing 40 years?
Catastrophic. NED NAYLOR-LEYLAND: The entire financialization of the
system came about because of this soft default on US Treasuries that happened and of course, there’s a soft default because it was a temporary
suspension of the convertibility of the dollar and i.e. they still owe that gold. DANIEL OLIVER: So, in common parlance when Nixon abandoned the gold standard that’s called in August of 1971. The idea is that gold is stopping money because the dollar
wasn’t tied to it and there were people who thought gold would collapse
without the monetary demand gold would go away is absolutely crazy. Because of course, it was a direct connection of gold
stabilize the dollar, not the other way around.

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