Did The Great Financial Crisis Start With The End Of The Gold Standard?

Tyler Durden's picture

It’s perhaps no co-incidence that the trend towards persistent deficits started around the final collapse of the last link to a quasi-Gold standard back in August 1971. As Deutsche Bank's Jim Reid notes, in a world of the Gold Standard or equivalent, those countries loosening policy too much would have seen a rush to convert their currencies into Gold thus destabilising their economic policy framework. Multi-year (let alone multi-decade) deficits and the GFC could not have occurred under a gold standard.

So with the shackles off and with nothing backing paper money, the post 1971 period has seen a uniquely long period of fiat currencies globally with a beggar-thy-neighbour rolling period of credit creation. Never before in observable history have so many countries been off a precious metal type currency system for so long. This move in 1971 helped create the conditions (alongside ever looser financial regulation) for almost unlimited credit and debt creation potential that would have been inconceivable through the annuls of economic history. The developed world in particular went on a 36 year credit/debt binge which probably lasted longer and was more aggressive than it would have been had it not been for China's globalisation moment 30 years ago. From this point they almost single handedly started a three decade period of suppressing global inflation thus allowing the credit/debt binge to become ever bigger without the inflationary check that would have likely otherwise occurred.

It’s worth reminding ourselves that this graph is compiled on a log scale which can visually understate the scale of the loss of purchasing power seen against Gold over the last century. Such losses did occur in stages though.


As can be seen from the graph, the 1930s Depressionary period, and the war-torn 1940s, saw sizeable devaluations against Gold from most countries as many re-valued or left the Gold Standard due to high economic stress. Post WWII, the Bretton Woods system then broadly stabilised currencies by creating a Dollar standard where the US agreed to convert Dollars into Gold at around $35 per ounce. After 20 plus years of relative currency stability (helped by heavy post WWII capital controls), the late 1960s started to see pressures building on this Dollar/Gold peg as some countries chose to switch their Dollars into Gold as concern mounted about the loosening of US monetary policy and on the other side some countries had to devalue within the system.

By 1971 President Nixon had decided that this peg was unsustainable and on 15th August he suspended convertibility - which leads to the inflationary debacle in our previous post.


So after 41 years of global fiat currencies and an unparalleled amount of debt that is proving very difficult to shift, we really are venturing into the unknown.

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reader2010's picture

It was called the greatest "Financial Innovation."

Xibalba's picture

Like CDS and CDO's....and well, throw ETF's in there too. 




Badabing's picture

The gold standard ended in 1913 when the fed started printing. By 1929 the market crashed with a bank run the excuse was “a gold shortage”.

Don’t you just love the way the fucking banks twist the truth, a gold shortage, not a surplus of paper dollars!!

Bring back the gold standard and use silver for the fluctuations along with the 90 day note and we be just fine. Last but not least put all responsible bankers in work camps for life!!!

ParkAveFlasher's picture

Well technically, it was a shortage of gold - as well as a shortage of ethics, responsibility, common sense, accountability, math prowess, ...

redpill's picture

To answer the question, no it began long before that, on Jekyll Island.

bloostar's picture

Whilst Dr Moreau was visiting no doubt...

NewWorldOrange's picture

A number of Dr Moreau's creatures.

Darth..Putter's picture

The only way there could possibly be a "shortage" of gold is by dictating the price of it.  No one was willing to sell at the price. 

There will always be plenty of gold if the price is allowed to be found by the markets.


Then again.....you do need a viable currency, at least Monopoly money is printed on paper, you just need enough of it.

ParkAveFlasher's picture

Exactly my point.  Such as, I will only buy apples for 1 cent (remember cents?  those were the days) per apple at the market one sunny day.  At the end of the day, I will find that I have an acute shortage of apples.

If the price falls in the woods, who will know it?



Chief KnocAHoma's picture

Herbert Stein - advisor to Richard Nixon had a saying "Something that cannot continue, won't."

At the time he was refering to the trade balance with Japan as those little yellow bastards were standing in line at our gold window shoveling paper through in return for metal.

So we decided to changes the rules, and go fiat only. Now Mr. Stein is about to be proven correct yet again. Something that cannot continue, won't... like relying on unbacked paper and blips of light, and this adjustment is going to be interesting.

The only way I can see it working is a US default, then adoption of a new currency. Then we could load cargo ships full of our current dollar and ship them to China with a note that reads "Choke on it". After that we can launch our new gold backed money for use in the states because something tells me no one will be willing to trade with us for a while.

outofhere's picture

Looks like at least 2 bankers have read your post!

Stoploss's picture

The gold standard's main influence was to control runaway gov't spending, in all govt's that used it. It has advantages, and disadvantages.


NewWorldOrange's picture

B-b-but several brilliant zh readers, just this morning, proved that the persistent high inflation in recent decades was caused not by CNTRL-P but by technological advances, increased industrial capacity, and population growth! They laid a chart of those things over the inflation chart, Hockey Stick like, and voila! They looked similar!


Cognitive Dissonance's picture

Of course it did. You can't screw things up this badly without at least several decades of trying.

And trust me on this one. They will continue to "try" until nothing's left but a smoking heap of ashes.

Xibalba's picture

If only bullshit were a currency...oh wait...IT IS!!!

JPM Hater001's picture

Do you know how to get to Brokeway?

Practice practice practice.

SpykerSpeed's picture

That's one thing you have to admire the socialists for:  persevering in the face of difficulty.  They just don't give up!

NewWorldOrange's picture

"They just don't give up!"

They just don't give up on demanding other people's money!

There. Completed it for ya'.

outofhere's picture

And Bill Cooper was warning us all through the 90's but only a few listened.  Now he is dead because he reported the the TRUTH.

Wake up 'sheople' was his mantra.


Revert_Back_to_1792_Act's picture

People brought stones from all 50 States to lay on his grave.

YouTube "Death of William Cooper" for a very interesting story.

He also warned of Government getting us to voluntarily surrender our rights via contracts.

To the awakened? at ZH: have you read what you signed and agreed to when you opened your last bank account?


Dr. Richard Head's picture

Linking to a barbaric relic is for sewing into garments. /sarc

Cognitive Dissonance's picture

When the looting of the middle class is over and the wealth and asset transfer is complete we will be lucky to have clothes to carry into the resettlement camps. We ain't seen nuttin' yet.

Don't think kaboom. Rather think of an elevator falling 100 floors in fits and starts. First it drops 15 stories, then catches for a bit, then down another 10 floors, then grinds to a halt on some debris.

Repeat as needed until there is a two class system world wide. The elite.....and everyone else.

Disclosure: Mrs Cog does NOT agree with me. :)

JPM Hater001's picture

Does "everyone else class" come with a free soda and snack?

If not I'll take elite please.

Cognitive Dissonance's picture

The resettlement camps will provide you with everything you need bro.


Personally I'm shooting for elite lite. No sense in getting greedy and screwing with my Karma. :>)

Dagny Taggart's picture

Kaboom happens whenever the reality of the looting crashes into YOUR life. For the homeless and permanently unemployed, the elevator has already crashed to the basement.

Ya know Cog, it's not your usual glowy and optimistic self to think "they" will succeed in making this a two class system. Agreed we ain't seen nothin' yet, but things have a way of not working out the way we think. Just sayin'... https://www.youtube.com/watch?v=ueAYUp4rHZI

Cognitive Dissonance's picture

"For the homeless and permanently unemployed, the elevator has already crashed to the basement."

I respectfully disagree simply because things can (and often do) go from bad to worse to horrible to Armageddon. Collapse occurs in stages.....unless of course you're talking about a controlled demolition. While I do think this financial crisis has been engineered there is still plenty of wealth remaining to be looted before the deed is done.

The barbarians at the gate are the last stage of the fall of empire. And they rarely find anything of value inside once they storm the gates because those in power within the (fallen) empire have already looted before beating a hasty retreat.

Unfortunately we (the collective we) have been so conditioned and corrupted that only a complete and utter collapse will be sufficient to wake us from our slumber so that we may recognize that we have, and always had, the power within.


mrktwtch2's picture

it was the repeal of glass stegal and of letting banks go from 12 to 1 leverage to 40 to 1..do some research you guys!!..gold standard has nothing to do with it..!!

Quintus's picture

Repealing the Glass Steagall act in 1999 caused the persistant and unprecedented accumulation of debt at all levels (Sovereign, Corporate, Individual...) that started in the 1970's?


ebworthen's picture

Repealing Glass Steagall kept the ball rolling.

After the S&L crisis, bankers needed more ways to leverage the markets.

Repealing Glass Steagall let the banks gamble with depositor money and create nefarious street games as MBS's, CDS's, rehypothecation, etc., etc.

When that well ran dry; they threatened collapse if they weren't bailed out with taxpayer money - a direct theft much more brazen and straightforward than printing money unhinged to gold or selling worthless crap to pension funds and municipalities.

Now, the bankers have in their pockets:  two candidates, a Supine Court, a Justice Department, a CONgress, and state governments to continue their legerdemain and skullduggery until they bleed every last penny from honest people and induce another World War.




whatsinaname's picture

401k money started coming into the markets in 1982.

jimmyjames's picture

it was the repeal of glass stegal and of letting banks go from 12 to 1 leverage to 40 to 1


What allowed banks to go beyond the 12-1 ratio was not the repeal of glass stegal-it was greenspan allowing banks to use sweeps to override reserve requirements and artificially ramp up reserves-starting in 1994-

LMAOLORI's picture



I am not going to agree/disagree on the Gold Standard but if you are going to talk about the current crisis/Glasss Steagall some information might be helpful for discussion

"Those who say that the financial recent crisis tells us to re-enact Glass-Steagall overlook what failed and what did not: the largest failures in the 2008 crisis – Lehman Brothers, AIG, and the Reserve Primary Fund – were not deposit-taking commercial banks on which Glass-Steagall’s repeal had a major impact. AIG was a mega-insurer. Lehman was an investment bank. The Reserve Primary Fund – brought down by its purchases of IOU’s from Lehman – was a money-market mutual fund, not a commercial bank."

 Lehman, Reserve Primary were not under the Fed's jurisdiction btw the SEC was responsible for them...


"Consider the experience of 2008. When Lehman Brothers Holdings Inc. went bankrupt, many money funds suffered significant losses. Sponsors supported all but one fund, and that single money fund -- the Reserve Primary Fund -- broke the buck. This triggered a stampede of withdrawals across the sector that threatened severe consequences for the economy and for millions of investors. The stampede was halted only when the U.S. Treasury stepped in to guarantee the value of the money funds, at taxpayer risk, and the Federal Reserve put in place additional emergency programs to backstop credit markets."


Money Market Funds are NOT 100% Safe

What triggered Lehman's loss?

bank guy in Brussels's picture

But the problem in the money-market funds really goes back to the problem of allowing lending above the 12-to-1 leverage ratio.

The whole new lending securitisation monster lets lending everywhere get out of control because instead of the old, stuffy, conservative, low-profit banking, we now have lenders whose source of funding is short-term paper getting rolled over from the money-market funds ... and the repos (repurchase agreements) and so on

In other words, shadow banking, as ZeroHedge as been quite ahead of the curve in covering

Everything levered up, 30 to 1 or even 50 or 60 to 1 ... immense fragility, and subject almost instantly to a 'crisis' that can be triggered in hundreds of ways, in runs on things that are not deposit banks but which governments have allowed to become systemically important

It's hard to wind down now ... but I suppose it will be like after the Great Depression in the US or the World Wars in Europe ... the coming decades will be scarred by what is happening in 2007-201x.

Landotfree's picture

No the problem is you are using interest.   Eventually you can't sustain the demands of the equation.  Eventually peak then collapse.  

The problem is the use of an equation which demands exponential growth.   You do not feed the equation its starts feeding on itself or more like humans. 

LMAOLORI's picture



I was just pointing out the crisis originated from a run on Lehman an investment bank that was full of sub-prime mortgages. In addition to Repo 105 Lehman had accounting fraud and it was claimed it would be moral hazard to bail them out since Lehman didn't have collateral to back up the loan & was the reason given as to why the Fed didn't rescue Lehman like they did AIG. That in turn caused the $2.4 Trillion Money Market's to start breaking the buck.  Again not a traditional bank.

Boston Fed: 78 money funds needed help Between 2007 and 2011, 21 funds would have ‘broken the buck,’ report says

AIG was an insurance company regulated by the Federal Office of Thrift Supervision whose trouble came because they sold too many credit default swipes (insurance against loan failures.) 

You have to remember also that the non traditional banks could not have money from the Fed window prior to the crisis they had to become Bank Holding Companies to do so thus the Goldman-SUCKS conspiracy. That is why Glass-Steagall would not have prevented the crisis the entities that got the crisis rolling were not traditional banks and were regulated by the SEC/Fed.Office of Thrift not the Fed.

"It's hard to wind down now"

I don't know why it would be so hard to wind them down I think that's just political nonsense. 


Clowns on Acid's picture

mrktwtch - some research ? Dude ..stand back and just read and listen...

If there had been a gold standard, to achieve 40 to 1 leverage would either, been impossible to reach given the restrictions of the gold standard, OR if still "blessed" by the Fed....gold would have quadrupled in price.

Now do you see how a gold standard would "restrict" immoral levels of leverage?

Oh wait a minute...who cares about morality..?

apberusdisvet's picture

The true unknown is what happens when the $quadrillion derivatives market implodes; which is why, of course, that QE-n on a global scale is coming.

madcows's picture

Not to worry.  AIG has that covered.

kito's picture


Did The Great Financial Crisis Start With The End Of The Gold Standard?



hmmm...answer seems too easy...............trick question tyler?..........................

Money 4 Nothing's picture

No, it started in 1913 under the Federal Reserve Act and hasn't stopped since. That's what happens when you have an offshore Central Bank with no loyalty to our nations flag run our Finances.

Kinda like Greece hiring Goldman Sachs to help manage their affairs, see how that turned out?

How do you own anything when you have spent the King's money to get it? So technically, You didn't build that.


"Give me control over a nations currency, and I care not who makes its laws.”

Baron M.A. Rothschild 

ParkAveFlasher's picture

Why does Figure 17 hate our freedoms?

jimmyjames's picture

From this point they almost single handedly started a three decade period of suppressing global inflation thus allowing the credit/debt binge to become ever bigger without the inflationary check that would have likely otherwise occurred.


Expanding credit is inflationary and is in fact-genuine inflation-

How does he come up with "suppressing global inflation"?

ParkAveFlasher's picture

Good one ... does he mean "supress nominal price inflation via market manipulations on a vast scale

css1971's picture

Yes it did.

Politicians find it easier to run a deficit to cover their lies than to tax people to cover their lies.

Dr. Engali's picture



End the Fed and the strangle hold the bankers have on the country.

It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. ... Abraham Lincoln



MaggieL's picture

Um...quote isn't Lincoln. 


It's Thomas Edison. See about halfway down the third column... NYT,  December 6, 1921