Analysis: Why Did We Abandon the Gold Standard?
The Gold standard alone will not bring back middle class prosperity. It is not the main reason why the middle class got destroyed in the last 50 years. But it did set the stage for the demise of the working class by other means.
When Nixon abandoned the Gold standard for the US Dollar, this was a small part in a much more important plan for the US economy. By the time the Gold standard was rescinded, The US economy was no longer able to sufficiently recycle its labor and finished good surpluses to export to Europe and Asia for profit. By the end of the 1960s, the growth in exports was ending while overseas exports to the US began increasing. Those parts of the world had recovered their manufacturing capability and began selling goods to themselves and the US.
Up until the early 1970s, the USA was the largest exporter of finished goods. But that was about to change. Further, the US had taken on significant debt financing the Korean and Vietnam wars.
What ironically became apparent was that deficit spending and financing of trade deficits did work to help the US outgrow the debt. The government learned this by actually overstating the amount of Gold reserves in their possession backing the Dollar. The problem they surmised was; due to Gold’s constraints on the money supply, the US’s ability to outrun the debt by adding to it in “pot-odds fashion” had run into a brick wall. Backing the USD with even less Gold, it seemed, helped solve their problems. So why not abandon it altogether? Enter Paul Volcker.
Paul Volcker served as under secretary of the Treasury for international monetary affairs from 1969 to 1974. He played an important role in President Nixon’s decision to suspend gold convertibility of the dollar on August 15, 1971, which resulted in the collapse of the Bretton Woods system. Volcker considered the suspension of gold convertibility “the single most important event of his career.”
Volcker came to realize the best strategy was to “embrace the deficits”. Why fight the deficits when we can boost them and grow? The US had accumulated massive wealth, why not borrow against it? Instead of fighting the deficits, accommodate them and set things up so we can profit from them. From that point on the deficits started to operate like a giant vacuum cleaner by absorbing other people’s goods and their capital. That arrangement can be understood in part by understanding that as the US trade deficit grew, so did foreign investment in the US. This created a large balanced world. US consumption on one side, and the world’s production on the other.
The world financed our spending. Wall Street profited by making fees off the repatriation of money that came back in investment form. Banks dictated policy.
Powered by the deficit spending, German, Japan, and now China kept creating goods and the US kept buying them. As long as trade flowed in this circular fashion, it gave the impression of balance. Almost 70% of world profits during this period flowed back to the US in capital flows and investment dollars.
We wrote the piece below in 2016 as part of an analysis of China’s Yuan ascending. It is still instructive on how the US secured the Dollar’s dominance when it went off the Gold Standard:
“Then : Gold > USD > PetroDollar
- Create Gold Demand: 1944 we steer world towards gold for good reason (we have it, and Germany’s lack of Gold was the cause for WW2)
- Inflate Debt: 1971 we have to monetize debt to pay for wars in Vietnam and Korea > go off gold standard
- Create USD Demand: 1974 cut Arab deal USD for Oil > we sell them military arms, they buy UST”
At the time of agreement of Bretton Woods, 1944, The United States controlled two thirds of the worlds gold and insisted that the act rest on the gold standard. THAT was total power of the world financial system. 2011, U.S. broke, Ben Bernanke says gold is not money. How times have changed.
By securing the US Dollar as world reserve currency, Volcker et al ensured that the dollar would have a perpetual bid under it relative to other fiat currencies. That relationship persists to this day based on a feeling of trust. The world views the US as the safest, most stable haven for its surplus capital. Therefore it has continued to invest in the US its excess profits.
But that is changing. And going back on the Gold standard will not happen. Even if it does, it will not restore Middle Class prosperity. It will be a part of a bigger reset type plan that will protect those fortunate enough to be able prepare for it.
That is why we went off the Gold standard. It is almost certainly why we will never explicitly go back on it. You see, the government only knows the same path and will go further down the rabbit hole. It will abolish cash. Then it will create digital money. It will finally separate the 2 qualities that money has from each other. The money we use will be a medium of exchange only. The money we don’t use, and few have, will be a store of value. But they will not be the same money. Stores of Value will be what they always have been. Try to hang onto yours whatever those may be.