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Happy 40th Birthday, Fiat Dollar!

You've come (down) a long way, baby
Monday, August 15, 2011, 1:49 PM

Exactly 40 years ago today, on August 15th 1971, the US dollar was released from the cruel tethers of an international gold standard. Today, we find notable monetary authorities seeking its return.

In the middle of a lengthy ~2,500 word speech in which Nixon sought to stabilize prices by implementing price controls and stabilize foreign trade by imposing tariffs, he slipped in these 100 words that sought to stabilize the dollar by going off the gold standard:

In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy – and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.

I have directed Secretary Connally to suspend temporarily the convertibility of the American dollar except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

It turns out that such intervention was actually counterproductive to the stated aims, so we are tempted to suspect that a different set of aims was met instead.  Perhaps these included the aims of unchecked government spending without a pesky gold tether and reinforcement of the belief that poor monetary and fiscal decisions can be eliminated by decree.

If so, then these aims were also not met, at least not over the long haul.

Today we find that the US has trillions in unbacked dollar liabilities lurking in central bank reserve accounts across the globe, biding their time for the day they will eventually be repatriated. And it has a fiscal train wreck in its hands.

Such are the (very) predictable consequences of limiting the rate and amount of money printing and spending solely by people's self-discipline. It has never worked out in the past, and (our marvelous technology and sophistication aside) it’s not working out this time, either, for the obvious reason that humans are still humans. iPads and carbon-fiber bicycles do nothing to change that simple fact.

What have we seen in the 40 years since that fateful decision to ‘temporarily suspend’ gold convertibility for the dollar?

  • GDP has advanced by 13.2 times
  • Government expenditures have increased by 17.3 times
  • Total credit market debt has increased by a whopping 31.0 times
  • The US went from a net-export positive to deeply negative country

The continuation of these trends requires a complete absence of limits on dollar creation going forward. However, there are abundant signs today that such a future simply is not sustainable, virtually assuring that the prior 40 years will prove to be a historical anomaly.

So, happy 40th birthday US dollar. 

Here’s hoping you make it to 50.

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19 Comments

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2391
Dollars overseas...

Thanks for this reminder Chris... this point is usually overlooked by the deflationistas;

"Today we find that the US has trillions in unbacked dollar liabilities lurking in central bank reserve accounts across the globe, biding their time for the day they will eventually be repatriated. And it has a fiscal train wreck in its hands."

And to imagine.. the FED used to actually provide at least one measure of all this money being emitted and held beyond our shores;

http://inflationdata.com/inflation/Inflation_Articles/M3_Money_supply.asp

If and when a worldwide loss of confidence in the US dollar happens, it will be a sight to behold - all of those dollars chasing real assets across the globe.  

 

Quercus bicolor's picture
Quercus bicolor
Status: Gold Member (Offline)
Joined: Mar 19 2008
Posts: 470
What have we seen in the 40

What have we seen in the 40 years since that fateful decision to ‘temporarily suspend’ gold convertibility for the dollar?

  • GDP has advanced by 13.2 times
  • Government expenditures have increased by 17.3 times
  • Total credit market debt has increased by a whopping 31.0 times
  • The US went from a net export positive to deeply negative country

And if we computed GDP as we did in 1971, what would the difference be between then and now?  9 or 10 times instead of 13.2?

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Sneak out the back door.

I think that the US should abandon the dollar and go back to the Pound Stirling.

That way it wont have to recognise it's efluvient.

Not that that will solve any problems. What about the other exponential curves, both positive and negative? Money is a representation of reality.

I'm going to get a sign for my front door." Reality begins here. Please mind the gap."

Anyway, thanks for reminding me how old I am.

Happy Birthday, $.

ao's picture
ao
Status: Diamond Member (Offline)
Joined: Feb 4 2009
Posts: 2220
Tricky Dicky and the Speculators

You gotta love Tricky Dicky.  His Quaker roots come through despite his pathological personality.  He was probably a terrible poker player.  Every time he lies, he can't help but show it. 

And those dang Speculators.  If one were to believe TPTB's version of history, all that we'd have to do is get rid of those nasty Speculators and everything would be hunky-dory.

Woodman's picture
Woodman
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Posts: 1028
I find most folks don't even

I find most folks don't even know what happened in 1971 and many guess we're on a gold standard still.  I didn't know before watching the Crash Course.  Thanks Chris for helping us understand.

idoctor's picture
idoctor
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SailAway's picture
SailAway
Status: Gold Member (Offline)
Joined: Aug 11 2010
Posts: 404
What if?

 

If the the USD was still backed by gold, how would the money supply expand with population and economic growth? Wouldn't it require over time to devalue the currency against gold (reduce how much 1 USD is worth in gold) to keep-up with economic growth? So if this is the case, what is the difference with a fiat USD if it's possible to devalue the currency possibly faster than economic growth?

 

 

guardia's picture
guardia
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Posts: 592
Re: What if?
SailAway wrote:

 

If the the USD was still backed by gold, how would the money supply expand with population and economic growth? Wouldn't it require over time to devalue the currency against gold (reduce how much 1 USD is worth in gold) to keep-up with economic growth? So if this is the case, what is the difference with a fiat USD if it's possible to devalue the currency possibly faster than economic growth?

The point is the currency does not get devalued, and things just get cheaper, if there is more stuff to buy that is...

SailAway's picture
SailAway
Status: Gold Member (Offline)
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Posts: 404
Re: What if?
guardia wrote:

The point is the currency does not get devalued, and things just get cheaper, if there is more stuff to buy that is...

But that's not great either if the value of your home goes down and you have a mortgage. Ideally you want stable prices. Also if Nixon didn't close the gold window the other option would have been to devaluate the USD to match the gold market price. Otherwise how could he has prevented for the US to lose its Gold?

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: What if?
SailAway wrote:
guardia wrote:

The point is the currency does not get devalued, and things just get cheaper, if there is more stuff to buy that is...

But that's not great either if the value of your home goes down and you have a mortgage. Ideally you want stable prices. Also if Nixon didn't close the gold window the other option would have been to devaluate the USD to match the gold market price. Otherwise how could he has prevented for the US to lose its Gold?

Interesting point.....  since being on this site I remember reading somewhere that if the $US was still tied to gold, gold would be worth at least $200,000 an ounce...

Heads you win, tails I lose.....

nickbert's picture
nickbert
Status: Diamond Member (Offline)
Joined: Jan 14 2009
Posts: 1208
The birthday boy has an appetite...
cmartenson wrote:

So happy 40th birthday US dollar. 

Here’s hoping you make it to 50.

Hey, 40 years old doesn't sound THAT bad.  Ok ok, I suppose in this case the birthday boy has also been living large the whole time on a heavy and ever-increasing diet of pork rinds, Taco Bell double-stuffed burritos, unfiltered cigarettes, Vicodin, and Red Bull & vodka.  And yes, maybe the birthday boy has very recently devoured that platter of deep fried cheese sticks stuffed inside Twinkies, for that emergency stimulus burst of energy.  Still, I can't possibly see how this can turn out badly.

Hmm, I spoke too soon..... it looks like the birthday boy is now hungrily eyeing the Log 'o Hog, or 'Bacon Explosion' (2 pounds of Italian sausage wrapped in 2 pounds of bacon and coated in BBQ sauce), and talking about the need for additional stimulus.

 

- Nickbert  (a "Log 'o Hog" survivor)

guardia's picture
guardia
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Posts: 592
Re: What if?
SailAway wrote:
guardia wrote:

The point is the currency does not get devalued, and things just get cheaper, if there is more stuff to buy that is...

But that's not great either if the value of your home goes down and you have a mortgage. Ideally you want stable prices. Also if Nixon didn't close the gold window the other option would have been to devaluate the USD to match the gold market price. Otherwise how could he has prevented for the US to lose its Gold?

Then you should have done business with a bank that doesn't screw people over with a mortgage and instead offers equities on the house. As for the dollar, Americans could have worked their asses off to get the dollar back up, like Japan today... have you checked the yen lately?

SailAway's picture
SailAway
Status: Gold Member (Offline)
Joined: Aug 11 2010
Posts: 404
Re: What if?
guardia wrote:
SailAway wrote:
guardia wrote:

The point is the currency does not get devalued, and things just get cheaper, if there is more stuff to buy that is...

But that's not great either if the value of your home goes down and you have a mortgage. Ideally you want stable prices. Also if Nixon didn't close the gold window the other option would have been to devalue the USD to match the gold market price. Otherwise how could he has prevented for the US to lose its Gold?

Then you should have done business with a bank that doesn't screw people over with a mortgage and instead offers equities on the house. As for the dollar, Americans could have worked their asses off to get the dollar back up, like Japan today... have you checked the yen lately?

Guardia,

I'm not sure that you understood my post. I'm not talking about the current situation and certainly not about my own circumstances.

What I'm trying to understand is why a currency backed by gold would be better than a fiat currency. The rational is that you cannot print gold but you can still devalue the currency, meaning changing how much a unit of currency is worth in gold.

If you don't allow the currency backed by gold to devalue then prices fall but it's not more desirable than rinsing prices. So ideally you'll have to constantly play with the currency/gold ratio to keep stable prices. So what's the difference with a fiat currency, in both cases it is still up to the regulators to be reasonable...

Also what do you in a currency system backed by gold if the parallel gold market price is higher than the fixed currency/gold ratio? How do you avoid people exchanging their notes for gold and then sell the gold for a premium on the market? It's apparently what Nixon was facing in 1971 when the European were exchanging theirs dollars for gold.

So is a fiat currency really worse than a currency backed by gold? The main problem with the fiat currency that we have today is it's backed by dept and because of compounding interests it must keep growing. So the system falls apart when economic growth stops.

So maybe the best (or less worse) system is a fiat currency just printed by the government adjusting the money supply to keep prices stable. It does not requires economic growth which is certainly an important feature today given the scarcity of natural resources. It does require however a reasonable government but so is a currency backed by gold isn't it?

 

tictac1's picture
tictac1
Status: Silver Member (Offline)
Joined: Sep 25 2009
Posts: 175
Amazing

People read this site and still don't get it...:)  No offense intended, we're all on some part of the learning curve.

Under a TRUE gold standard, prices don't steadily increase OR decrease, they fluctuate with ACTUAL demand.  Yes, you still have business cycles, but they are not the wild, exploitable swings we get with fiat/debt capitalism.  We have not had a real gold standard since 1913.  Look at the historic value of gold before the serious tampering began.  Like land prices, is was quite stable for HUNDREDS of years.

ANY market fixing is bad in the long run, whether it's fiat gold pricing, or fiat paper printing.  In both cases, you have a government trying to dictate to people the value of a thing, which is ridiculous, and doesn't work.

Prices don't just rise.  Inflation is caused by fiat money/debt capitalism, and this is done BY DESIGN-

http://www.constitution.org/mon/greenspan_gold.htm

The current situation isn't something Obama dreamed up, nor Bush.  It is an insidious plan to enslave the peoples of the world. 

It won't work of course, or at least not for long, but between now and it's ultimate demise, it could get a little dicey.

SailAway's picture
SailAway
Status: Gold Member (Offline)
Joined: Aug 11 2010
Posts: 404
re: Amazing
tictac1 wrote:

People read this site and still don't get it...:)  No offense intended, we're all on some part of the learning curve.

Under a TRUE gold standard, prices don't steadily increase OR decrease, they fluctuate with ACTUAL demand.  Yes, you still have business cycles, but they are not the wild, exploitable swings we get with fiat/debt capitalism.  We have not had a real gold standard since 1913.  Look at the historic value of gold before the serious tampering began.  Like land prices, is was quite stable for HUNDREDS of years.

ANY market fixing is bad in the long run, whether it's fiat gold pricing, or fiat paper printing.  In both cases, you have a government trying to dictate to people the value of a thing, which is ridiculous, and doesn't work.

Prices don't just rise.  Inflation is caused by fiat money/debt capitalism, and this is done BY DESIGN-

http://www.constitution.org/mon/greenspan_gold.htm

The current situation isn't something Obama dreamed up, nor Bush.  It is an insidious plan to enslave the peoples of the world. 

It won't work of course, or at least not for long, but between now and it's ultimate demise, it could get a little dicey.

Thanks for the link, I'll read it another time to make sure I understand the details.

The hundreds of years of price stability that you mentioned happened when the world population was stable, only limited amount of energy was available and economic growth was minimum. Under these conditions I can see all the benefits of a true gold standard.

But during the last 200 years thanks to a huge amount of cheap energy the world population has increased many folds as so have real assets. So how in these conditions a limited amount of gold can be a good currency system is still not clear to me, but I'm glad that you got it...:)

I'll keep researching.

Thanks

 

Kid-Canada's picture
Kid-Canada
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Joined: Aug 4 2011
Posts: 5
http://www.constitution.org/m

http://www.constitution.org/mon/greenspan_gold.htm

 

Yikes, talk about a complete betrayal of your personal views, if these were his true views on the gold standard and inflation. The welfare state has been dismantled to a degree in every western society

This is the same Allen Greenspan that appeared on Canadian news a few nights ago and stated the United States's trade deficit was not a big deal since they could just print more money to balance it out....

ramsteiner's picture
ramsteiner
Status: Member (Offline)
Joined: Sep 13 2010
Posts: 1
What if?

After looking over different ways for the USA to tackle/approach our monetary system with the help of several other like-minded individuals, we have to ask several questions.

1) Who prints the money within our current monetary system?

2) Who controls the amount of money within our current monetary system?

3) How is the money within our current monetary system backed?

4) When looking at returning the dollar back to Gold standard, who controls the gold?

(this question is asked as the USA has no reliable record of how much gold is still owned and retained by the US Government since the last recorded audit was back in the 1950's despite the legal requirement to audit more than once a century)

5) What other monetary systems have existed previously around the world and within the USA?

6) How did these other monetary systems work and what caused them to be replaced by the current monetary system (globally and nationally)?

 

Who prints the money in the US? The Federal Reserve

Who control the amount of money? The Federal Reserve

These two questions now raise the question, who runs the Federal Reserve? Private bankers (international bankers to be more specific)

How is the money backed? There is no backing as the money is a Fiat currency (realistically).

Who controls the gold? The banks control the majority of gold reserves. Governments may state they have control but if bankers call on the loans governments have taken out the gold would be the method of repayment, end result - banks control the gold.

If banks control the gold and going back to a gold standard is the rallying call, all anyone is doing is replacing one form of banker control with another banker control. Result, no difference.

The best answer seen so far for answering what other monetary systems have existed and what caused them be replaced with the current monetary system in use today is in two different videos on YouTube.

"The Secret of Oz" =>

 "Money as Debt" =>

 

John Steinsvold's picture
John Steinsvold
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Posts: 16
Goodby Dollar!
An Alternative to Capitalism (where everyone is middle class)
 
Several decades ago, Margaret Thatcher claimed: "There is no alternative". She was referring to capitalism. Today, this negative attitude still persists.
 
I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to an essay titled: "Home of the Brave?" which was published by the Athenaeum Library of Philosophy:
 
http://evans-experientialism.freewebspace.com/steinsvold.htm
 
John Steinsvold
 
--Georg C. Lichtenberg

Perhaps in time the so-called dark ages will be thought of as including our own.

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