Douglas Carswell

16 AUG 2016

It's time to end Nixon's failed monetary experiment

Richard Nixon was, in many respects, a disastrous president – chiefly remembered for Vietnam and Watergate. But one of his most destructive legacies is often forgotten. It began forty-five years ago yesterday, when he decoupled the dollar from gold.

By ending the Bretton Woods system, Nixon began an experiment that had never been tried in the world before: free-floating, fiat currencies, unbacked by any commodity. For the first time, governments had a total monopoly over the means of exchange.

Bretton Woods – or the gold-exchange standard – wasn't the same as the classical gold standard. It had fundamental flaws.

The idea was that the dollar would be convertible to gold at a fixed rate – although crucially only foreign governments, not individuals, could convert it. Other currencies, meanwhile, could be exchanged for the dollar, which would serve as the global reserve currency.

In practice, the Federal Reserve increased the money supply, inflating the dollar. The real value of the dollar fell, but the nominal price in gold didn't. So, naturally, other countries swapped their dollars for gold, causing a gold run.

But inflation before 1971 is nothing compared to the inflation since. Unbound by any link an external constraint, central banks have gone into overdrive: printing money to boost credit, artificially inflate markets, and fund government deficits.

The price of one ounce of gold has risen from $40 in 1971 to $1,339 today: a 3072% increase. Before 1971, the dollar price of gold had barely doubled in 200 years.

Gold hasn't got more expensive: money has become cheaper.

"So what?" you might think. "Why does it matter?"

Actually, it's hugely important.

Every housing bubble. Every debt crisis. Every banking failure. Every small correction that low interest rates obscure, and major crash that they create. Every bank bailout and subsidy scheme that transfers resources from wealth creators to rent-seekers, and entrenches inequality.

All of it can be traced to the full nationalisation of the money supply.

Financial pundits today treat today's monetary system as if it's normal. Any suggestion of fundamental change is seen as kooky and absurd. They seem to forget the current system has only been around for 45 years – and, in that short time, has brought the global economy to the brink of collapse.

To be a functioning means of exchange, money shouldn't be susceptible to debasement at the whims of central bankers. Commodity-backed money offers some security. Competing currencies, whereby the ultimate guarantor of value is the market, might be better still.

But first, we need to admit that Nixon's monetary experiment has failed.

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