Still No Crash: Were Austrian Economists Wrong about the Dollar? – Robert Murphy
Source: LibertyChat.com
By Robert Murphy
Critics of the U.S. government often warn of the dangers of “fiat money.” Indeed, ever since the Richard Nixon severed the dollar’s gold backing (in 1971), many proponents of “hard money” have warned about a dollar crash. This has led critics of these “gold bugs” to laugh at their seemingly erroneous predictions and crankish views. In the present post I’ll walk through some of the main issues in this area. As we’ll see, the “gold bugs” may have the last laugh.
Under the classical gold standard, the U.S. dollar was convertible into gold at the rate of $20.67 per ounce. When FDR came into office in 1933, he took the dollar off this strict peg and confiscated the nation’s gold. (The famous gold depository at Fort Knox was actually constructed in order to store the gold stolen from Americans.) Eventually the dollar was locked into a stable convertibility ratio of $35 per ounce, which lasted throughout the Bretton Woods era following World War II. Under this arrangement, regular citizens had no right to turn in their paper dollars for gold, but other central banks could do so. The rest of the world was encouraged to use dollars—not gold—as their reserve, because (they were told) the dollar itself was as good as gold.
The huge government expenditures of the late 1960s—including the Vietnam War and LBJ’s “War on Poverty”—caused the Federal Reserve to issue new dollars in order to purchase the federal government’s bond issues. In other words, it was the time-honored method of government turning to the printing press (indirectly in this case) to cover its budget deficits during wartime. Other governments began to get nervous, notably France, and began sending their dollars back to the U.S. for redemption in gold. This eventually put the U.S. government in a position of either slowing its monetary inflation (and hence cutting its spending), or abandoning its commitment to redeem dollars in gold. Nixon opted for the latter in 1971.
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Source: LibertyChat.com
By Robert Murphy
Critics of the U.S. government often warn of the dangers of “fiat money.” Indeed, ever since the Richard Nixon severed the dollar’s gold backing (in 1971), many proponents of “hard money” have warned about a dollar crash. This has led critics of these “gold bugs” to laugh at their seemingly erroneous predictions and crankish views. In the present post I’ll walk through some of the main issues in this area. As we’ll see, the “gold bugs” may have the last laugh.
Under the classical gold standard, the U.S. dollar was convertible into gold at the rate of $20.67 per ounce. When FDR came into office in 1933, he took the dollar off this strict peg and confiscated the nation’s gold. (The famous gold depository at Fort Knox was actually constructed in order to store the gold stolen from Americans.) Eventually the dollar was locked into a stable convertibility ratio of $35 per ounce, which lasted throughout the Bretton Woods era following World War II. Under this arrangement, regular citizens had no right to turn in their paper dollars for gold, but other central banks could do so. The rest of the world was encouraged to use dollars—not gold—as their reserve, because (they were told) the dollar itself was as good as gold.
The huge government expenditures of the late 1960s—including the Vietnam War and LBJ’s “War on Poverty”—caused the Federal Reserve to issue new dollars in order to purchase the federal government’s bond issues. In other words, it was the time-honored method of government turning to the printing press (indirectly in this case) to cover its budget deficits during wartime. Other governments began to get nervous, notably France, and began sending their dollars back to the U.S. for redemption in gold. This eventually put the U.S. government in a position of either slowing its monetary inflation (and hence cutting its spending), or abandoning its commitment to redeem dollars in gold. Nixon opted for the latter in 1971.
Read more
