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NOTE IV. The Monetary Breakdown of the West

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Chapter 4 The Monetary Breakdown of the West

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Since the first edition of this book was written, the chickens of the monetary interventionists

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have come home to roost.

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The world monetary crisis of February and March 1973, followed by the dollar plunge

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of July, was only the latest of an accelerating series of crises which provide a virtual textbook

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Illustration of our Analysis of the Inevitable Consequences of Government Intervention in

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the Monetary System.

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After each crisis is temporarily allayed by a band-aid solution, the governments of the

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West loudly announce that the world monetary system has now been placed on sure footing,

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and that all the monetary crises have been solved.

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President Nixon went so far as to call the Smithsonian Agreement of December 18, 1971,

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The greatest monetary agreement in the history of the world, only to see this greatest agreement

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collapse in a little over a year.

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Each solution has crumbled more rapidly than its predecessor.

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To understand the current monetary chaos, it is necessary to trace briefly the international

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monetary developments of the 20th century and to see how each set of unsound inflationist

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Interventions has collapsed of its own inherent problems, only to set the stage for another

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round of interventions.

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The 20th century history of the world monetary order can be divided into nine phases.

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Let us examine each in turn.

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1.

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Phase 1.

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The Classical Gold Standard, 1815-1914

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We can look back upon the classical gold standard, the western world of the nineteenth and early

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twentieth centuries, as the literal and metaphorical golden age.

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With the exception of the troublesome problem of silver, the world was on a gold standard,

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which meant that each national currency, the dollar, the pound, franc, etc., was merely

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a name for a certain definite weight of gold.

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The dollar, for example, was defined as one-twentieth of a gold ounce, the pound sterling as slightly

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less than one-fourth of a gold ounce, and so on.

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This meant that the exchange rates between the various national currencies were fixed,

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not because they were arbitrarily controlled by government, but in the same way that one

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pound of weight is defined as being equal to sixteen ounces.

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The international gold standard meant that the benefits of having one money medium were

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extended throughout the world.

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One of the reasons for the growth and prosperity of the United States has been the fact that

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we have enjoyed one money throughout the large area of the country.

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We have had a gold or at least a single dollar standard within the entire country and did

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not have to suffer the chaos of each city and county issuing its own money, which would

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and then fluctuate with respect to the monies of all the other cities and counties.

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The 19th century saw the benefits of one money throughout the civilized world.

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One money facilitated freedom of trade, investment and travel throughout that trading and monetary

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area, with the consequent growth of specialization and the international division of labor.

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It must be emphasized that gold was not selected arbitrarily by governments to be the monetary

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standard.

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Gold had developed for many centuries on the free market as the best money, as the commodity

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providing the most stable and desirable monetary medium.

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Above all, the supply and provision of gold was subject only to market forces and not

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to the arbitrary printing press of the government.

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The international gold standard provided an automatic market mechanism for checking the

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inflationary potential of government.

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It also provided an automatic mechanism for keeping the balance of payments of each country

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in equilibrium.

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As the philosopher and economist David Hume pointed out in the mid-18th century, if one

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nation, say France, inflates its supply of paper francs, its prices rise.

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The increasing incomes in paper francs stimulate imports from abroad, which are also spurred

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by the fact that prices of imports are now relatively cheaper than prices at home.

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At the same time, the higher prices at home discourage exports abroad.

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The result is a deficit in the balance of payments, which must be paid for by foreign

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countries cashing in francs for gold.

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The gold outflow means that France must eventually contract its inflated paper francs in order

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to prevent a loss of all of its gold.

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If the inflation has taken the form of bank deposits, then the French banks have to contract

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their loans and deposits in order to avoid bankruptcy as foreigners call upon the French

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banks to redeem their deposits in gold.

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The contraction lowers prices at home and generates an export surplus, thereby reversing the gold

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outflow until the price levels are equalized in France and in other countries as well.

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It is true that the interventions of governments previous to the 19th century weakened the

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speed of this market mechanism and allowed for a business cycle of inflation and recession

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within this gold standard framework.

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These interventions were particularly the government's monopolizing of the mint, legal

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tender laws, the creation of paper money and the development of inflationary banking propelled

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by each of the governments.

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But while these interventions slowed the adjustments of the market, these adjustments were still

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in ultimate control of the situation.

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So while the classical gold standard of the 19th century was not perfect and allowed for

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For relatively minor booms and busts, it still provided us with by far the best monetary order

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the world has ever known, an order which worked, which kept business cycles from getting out

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of hand, and which enabled the development of free international trade, exchange and

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investment.

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2.

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Phase 2.

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World War I and After

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If the classical gold standard worked so well, why did it break down?

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It broke down because governments were entrusted with the task of keeping their monetary promises,

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of seeing to it that pounds, dollars, francs, etc. were always redeemable in gold, as they

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and their controlled banking system had pledged.

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It was not gold that failed, it was the folly of trusting government to keep its promises.

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To wage the catastrophic war of World War I, each government had to inflate its own

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supply of paper and bank currency.

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So severe was this inflation that it was impossible for the warring governments to keep their

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pledges, and so they went off the gold standard, that is, declared their own bankruptcy, shortly

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after entering the war.

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All except the United States, which entered the war late and did not inflate the supply

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and the supply of dollars enough to endanger redeemability.

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But apart from the United States, the world suffered what some economists now hail as the

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nirvana of freely fluctuating exchange rates, now called dirty floats, competitive devaluations,

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warring currency blocks, exchange controls, tariffs and quotas, and the breakdown of international

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trade and investment.

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The inflated pounds, francs, marks, etc. depreciated in relation to gold and the dollar.

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Monetary chaos abounded throughout the world.

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In those days there were happily very few economists to hail this situation as the monetary

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ideal.

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It was generally recognized that phase two was the threshold to international disaster,

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And politicians and economists looked around for ways to restore the stability and freedom

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of the classical gold standard.

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3. Phase 3. The Gold Exchange Standard. Britain and the United States. 1926-1931.

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How to return to the golden age? The sensible thing to do would have been to recognize the

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The Facts of Reality, The Fact of the Depreciated Pound, Frank, Mark, etc. and to return to

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the gold standard at a redefined rate, a rate that would recognize the existing supply of

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money and price levels.

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The British pound, for example, had been traditionally defined at a weight which made it equal to

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$4.86.

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But by the end of World War I, the inflation in Britain had brought the pound down to approximately

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$3.50 on the free foreign exchange market. Other currencies were similarly depreciated.

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The sensible policy would have been for Britain to return to gold at approximately $3.50,

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and for the other inflated countries to do the same. Phase 1 could have been smoothly

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and rapidly restored. Instead, the British made the fateful decision to return to gold

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at the old par of $4.86. It did so for reasons of British national prestige, and in a vain

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attempt to re-establish London as the hard-money financial center of the world. To succeed

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at this piece of heroic folly, Britain would have had to deflate severely its money supply

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and its price levels. For at a $4.86 pound, British export prices were far too high to

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to be competitive in the world markets.

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But deflation was now politically out of the question, for the growth of trade unions,

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buttressed by a nationwide system of unemployment insurance, had made wage rates rigid downward.

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In order to deflate, the British government would have had to reverse the growth of its

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welfare state.

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In fact, the British wished to continue to inflate money and prices.

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As a result of combining inflation with a return to an overvalued par, British exports

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were depressed all during the 1920s, and unemployment was severe all during the period when most

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of the world was experiencing an economic boom.

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How could the British try to have their cake and eat it at the same time?

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By establishing a new international monetary order which would induce or coerce other governments

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This is precisely what Britain did, as it led the way at the Genoa Conference of 1922

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in creating a new international monetary order, the gold exchange standard.

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The gold exchange standard worked as follows.

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The United States remained on the classical gold standard, redeeming dollars in gold.

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Britain and the other countries of the West, however, returned to a pseudo gold standard.

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Britain in 1926 and the other countries around the same time.

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British pounds and other currencies were not payable in gold coins, but only in large-sized

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and the first bars, suitable only for international transactions.

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This prevented the ordinary citizens of Britain and other European countries from using gold

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in their daily life, and thus permitted a wider degree of paper and bank inflation.

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But furthermore, Britain redeemed pounds not merely in gold, but also in dollars, while

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the other countries redeemed their currencies not in gold, but in pounds.

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Most of these countries were induced by Britain to return to gold at overvalued parities.

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The result was a pyramiding of United States on gold, of British pounds on dollars, and

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of other European currencies on pounds.

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The gold exchange standard with the dollar and the pound as the two key currencies.

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Now when Britain inflated and experienced a deficit in its balance of payments, the

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The gold standard mechanism did not work to quickly restrict British inflation, for instead

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of other countries redeeming their pounds for gold, they kept the pounds and inflated

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on top of them.

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Hence Britain and Europe were permitted to inflate unchecked, and British deficits could

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pile up unrestrained by the market discipline of the gold standard.

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As for the United States, Britain was able to induce the United States to inflate dollars

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so as not to lose many dollar reserves or gold to the United States.

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The point of the gold exchange standard is that it cannot last, the piper must eventually

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be paid, but only in a disastrous reaction to the lengthy inflationary boom.

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As sterling balances piled up in France, the United States and elsewhere, the slightest

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loss of confidence in the increasingly shaky and jerry-built inflationary structure was

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bound to lead to general collapse.

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This is precisely what happened in 1931.

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The failure of inflated banks throughout Europe and the attempt of hard-money France to cash

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in its sterling balances for gold led Britain to go off the gold standard completely.

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4. Phase 4. Fluctuating Fiat Currencies, 1931-1945

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The world was now back to the monetary chaos of World War I, except that now there seemed

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to be little hope for a restoration of gold. The international economic order had disintegrated

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into the chaos of clean and dirty floating exchange rates, competing devaluations, exchange

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controls and trade barriers.

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International economic and monetary warfare raged between currencies and currency blocks.

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International trade and investment came to a virtual standstill and trade was conducted

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through barter agreements conducted by governments competing and conflicting with one another.

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Theory of State Cordell Hull repeatedly pointed out that these monetary and economic conflicts

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of the 1930s were the major cause of World War II.

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The United States remained on the gold standard for two years, and then in 1933 and 1934 went

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off the classical gold standard in a vain attempt to get out of the Depression.

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American citizens could no longer redeem dollars in gold, and were even prohibited from owning

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any gold, either here or abroad.

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But the United States remained after 1934 on a peculiar new form of gold standard, in

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which the dollar, now redefined to one-thirty-fifth of a gold ounce, was redeemable in gold to

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to Foreign Governments and Central Banks. A lingering tie to gold remained. Furthermore,

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the monetary chaos in Europe led to gold flowing into the only relatively safe monetary haven,

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the United States. The chaos and the unbridled economic warfare of the 1930s points up an

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important lesson. The grievous political flaw, apart from the economic problems in the Milton

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Friedman-Chicago School monetary scheme for freely fluctuating fiat currencies.

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For what the Friedmanites would do, in the name of the free market, is to cut all ties

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to gold completely, leave the absolute control of each national currency in the hands of

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its central government, issuing fiat paper as legal tender, and then advise each government

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to allow its currency to fluctuate freely with respect to all other fiat currencies,

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as well as to refrain from inflating its currency too outrageously.

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The grave political flaw is to hand total control of the money supply to the nation-state,

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and then to hope and expect that the state will refrain from using that power.

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And since power always tends to be used, including the power to counterfeit legally, the naïve

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And so, the disastrous experience of Phase Four, the 1930s world of fiat paper and economic warfare, led the United States authorities to adopt as their major economic war aim of World War II the restoration of a viable international monetary order, an order on which could be built a renaissance of world trade and the resurgence of the world economy.

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The Fruits of the International Division of Labor

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5 Phase 5 Bretton Woods and the New Gold Exchange Standard,

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The United States, 1945-1968

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The new international monetary order was conceived and then driven through by the United States

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at an International Monetary Conference at Bretton Woods, New Hampshire in mid-1944 and

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ratified by the Congress in July 1945. While the Bretton Woods system worked far better

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than the disaster of the 1930s, it worked only as another inflationary recrudescence

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of the gold exchange standard of the 1920s, and, like the 1920s, the system lived only

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on Borrowed Time.

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The new system was essentially the gold exchange standard of the 1920s, but with the dollar

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rudely displacing the British pound as one of the key currencies.

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Now the dollar, valued at one-thirty-fifth of a gold ounce, was to be the only key currency.

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The other difference from the 1920s was that the dollar was no longer redeemable in gold

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to American Citizens. Instead, the 1930s system was continued, with the dollar redeemable

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in gold only to foreign governments and their central banks. No private individuals, only

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governments were to be allowed the privilege of redeeming dollars in the world gold currency.

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In the Bretton Woods system, the United States pyramided dollars in paper money and in bank

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Deposits on top of gold, in which dollars could be redeemed by foreign governments,

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while all other governments held dollars as their basic reserve and pyramided their currency

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on top of dollars.

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And since the United States began the post-war world with a huge stock of gold, approximately

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$25 billion, there was plenty of play for pyramiding dollar claims on top of it.

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Furthermore, the system could work for a while because all the world's currencies returned

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to the new system at their pre-World War II pars, most of which were highly overvalued

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in terms of their inflated and depreciated currencies.

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The inflated pound sterling, for example, returned at $4.86, even though it was worth

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far less than that in terms of purchasing power on the market.

223
00:20:57.580 --> 00:21:04.540
Since the dollar was artificially undervalued and most other currencies overvalued in 1945,

224
00:21:04.540 --> 00:21:09.900
the dollar was made scarce, and the world suffered from a so-called dollar shortage,

225
00:21:09.900 --> 00:21:16.180
which the American taxpayer was supposed to be obligated to make up by foreign aid.

226
00:21:16.180 --> 00:21:22.340
In short, the export surplus enjoyed by the undervalued American dollar was to be partly

227
00:21:22.340 --> 00:21:28.660
be financed by the hapless American taxpayer in the form of foreign aid.

228
00:21:28.660 --> 00:21:34.060
There being plenty of room for inflation before retribution could set in, the United States

229
00:21:34.060 --> 00:21:39.980
government embarked on its post-war policy of continual monetary inflation, a policy

230
00:21:39.980 --> 00:21:43.300
it has pursued merrily ever since.

231
00:21:43.300 --> 00:21:49.140
By the early 1950s, the continuing American inflation began to turn the tide of international

232
00:21:49.140 --> 00:21:50.140
Trade

233
00:21:50.140 --> 00:21:55.840
For while the United States was inflating and expanding money and credit, the major

234
00:21:55.840 --> 00:22:02.540
European governments, many of them influenced by Austrian monetary advisors, pursued a relatively

235
00:22:02.540 --> 00:22:09.140
hard money policy, for example, West Germany, Switzerland, France, Italy.

236
00:22:09.140 --> 00:22:15.660
Steeply inflationist Britain was compelled by its outflow of dollars to devalue the pound

237
00:22:15.660 --> 00:22:17.860
to more realistic levels.

238
00:22:17.860 --> 00:22:24.760
For a while, it was approximately $2.40. All this, combined with the increasing productivity

239
00:22:24.760 --> 00:22:31.060
of Europe and, later, Japan, led to continuing balance of payments deficits with the United

240
00:22:31.060 --> 00:22:39.700
States. As the 1950s and 1960s wore on, the United States became more and more inflationist,

241
00:22:39.700 --> 00:22:46.500
both absolutely and relatively to Japan and Western Europe. But the classical gold standard

242
00:22:46.500 --> 00:22:52.740
The check on inflation, especially American inflation, was gone, for the rules of the

243
00:22:52.740 --> 00:22:58.300
Bretton Woods game provided that the West European countries had to keep piling up their

244
00:22:58.300 --> 00:23:05.980
reserve and even use these dollars as a base to inflate their own currency and credit.

245
00:23:05.980 --> 00:23:11.980
But as the 1950s and 1960s continued, the harder money countries of West Europe and

246
00:23:11.980 --> 00:23:18.820
Japan became restless at being forced to pile up dollars that were now increasingly overvalued

247
00:23:18.820 --> 00:23:21.240
instead of undervalued.

248
00:23:21.240 --> 00:23:27.420
As the purchasing power, and hence the true value of dollars, fell, they became increasingly

249
00:23:27.420 --> 00:23:30.220
unwanted by foreign governments.

250
00:23:30.220 --> 00:23:34.820
But they were locked into a system that was more and more of a nightmare.

251
00:23:34.820 --> 00:23:40.980
The American reaction to the European complaints, headed by France and de Gaulle's major monetary

252
00:23:40.980 --> 00:23:47.300
Secretary-Advisor, the classical gold standard economist Jacques Ruff, was merely scorn and

253
00:23:47.300 --> 00:23:49.740
brusque dismissal.

254
00:23:49.740 --> 00:23:54.540
American politicians and economists simply declared that Europe was forced to use the

255
00:23:54.540 --> 00:24:00.140
dollar as its currency, that it could do nothing about its growing problems, and therefore

256
00:24:00.140 --> 00:24:06.460
the United States could keep blithely inflating while pursuing a policy of benign neglect

257
00:24:06.460 --> 00:24:11.700
toward the international monetary consequences of its own actions.

258
00:24:11.700 --> 00:24:18.780
But Europe did have the legal option of redeeming dollars in gold at $35 an ounce, and as the

259
00:24:18.780 --> 00:24:25.100
dollar became increasingly overvalued in terms of hard money currencies and gold, European

260
00:24:25.100 --> 00:24:30.040
governments began more and more to exercise that option.

261
00:24:30.040 --> 00:24:36.600
The gold standard check was coming into use, hence gold flowed steadily out of the United

262
00:24:36.600 --> 00:24:43.240
States for two decades after the early 1950s, until the United States gold stock dwindled

263
00:24:43.240 --> 00:24:49.240
over this period from over $20 billion to $9 billion.

264
00:24:49.240 --> 00:24:54.880
As dollars kept inflating upon a dwindling gold base, how could the United States keep

265
00:24:54.880 --> 00:25:01.040
Stop redeeming foreign dollars in gold, the cornerstone of the Bretton Woods system.

266
00:25:01.040 --> 00:25:06.980
These problems did not slow down continued United States inflation of dollars and prices,

267
00:25:06.980 --> 00:25:13.640
or the United States policy of benign neglect, which resulted by the late 1960s in an accelerated

268
00:25:13.640 --> 00:25:22.000
pile-up of no less than $80 billion in unwanted dollars in Europe, known as Eurodollars.

269
00:25:22.000 --> 00:25:28.120
To try to stop European redemption of dollars into gold, the United States exerted intense

270
00:25:28.120 --> 00:25:34.180
political pressure on the European governments, similar but on a far larger scale to the British

271
00:25:34.180 --> 00:25:41.320
cajoling of France not to redeem its heavy sterling balances until 1931.

272
00:25:41.320 --> 00:25:46.640
But economic law has a way, at long last, of catching up with governments, and this

273
00:25:46.640 --> 00:25:51.260
This is what happened to the inflation-happy United States government by the end of the

274
00:25:51.260 --> 00:25:53.260
1960s.

275
00:25:53.260 --> 00:25:58.400
The gold exchange system of Bretton Woods, hailed by the United States political and

276
00:25:58.400 --> 00:26:06.840
economic establishment as permanent and impregnable, began to unravel rapidly in 1968.

277
00:26:06.840 --> 00:26:09.040
6.

278
00:26:09.040 --> 00:26:17.400
Phase Six, The Unraveling of Bretton Woods, 1968-1971

279
00:26:17.400 --> 00:26:23.240
As dollars piled up abroad and gold continued to flow outward, the United States found it

280
00:26:23.240 --> 00:26:29.920
increasingly difficult to maintain the price of gold at $35 an ounce in the free gold markets

281
00:26:29.920 --> 00:26:32.280
at London and Zurich.

282
00:26:32.280 --> 00:26:38.740
$35 an ounce was the keystone of the system, and while American citizens have been barred

283
00:26:38.740 --> 00:26:45.140
Since 1934, from owning gold anywhere in the world, other citizens have enjoyed the freedom

284
00:26:45.140 --> 00:26:47.740
to own gold bullion and coin.

285
00:26:47.740 --> 00:26:54.100
Hence, one way for individual Europeans to redeem their dollars in gold was to sell their

286
00:26:54.100 --> 00:26:59.880
dollars for gold at $35 an ounce in the free gold market.

287
00:26:59.880 --> 00:27:05.580
As the dollar kept inflating and depreciating, and as American balance of payments deficits

288
00:27:05.580 --> 00:27:32.700
A crisis of confidence in the dollar on the free gold markets led the United States to

289
00:27:32.700 --> 00:27:38.700
to effect a fundamental change in the monetary system in March 1968.

290
00:27:38.700 --> 00:27:44.620
The idea was to stop the pesky free gold market from ever again endangering the Bretton Woods

291
00:27:44.620 --> 00:27:46.260
arrangement.

292
00:27:46.260 --> 00:27:50.260
Hence was born the two-tier gold market.

293
00:27:50.260 --> 00:27:54.460
The idea was that the free gold market could go to blazes.

294
00:27:54.460 --> 00:28:00.100
It would be strictly insulated from the real monetary action in the central banks and governments

295
00:28:00.100 --> 00:28:01.680
of the world.

296
00:28:01.680 --> 00:28:07.760
The United States would no longer try to keep the free market gold price at $35. It would

297
00:28:07.760 --> 00:28:13.640
ignore the free gold market, and it and all the other governments agreed to keep the value

298
00:28:13.640 --> 00:28:20.480
of the dollar at $35 an ounce forevermore. The governments and central banks of the world

299
00:28:20.480 --> 00:28:26.720
would henceforth buy no more gold from the outside market, and would sell no more gold

300
00:28:26.720 --> 00:28:33.200
to that market. From now on, gold would simply move as counters from one central bank to

301
00:28:33.200 --> 00:28:40.120
another and new gold supplies, free gold market or private demand for gold would take their

302
00:28:40.120 --> 00:28:46.680
own course, completely separated from the monetary arrangements of the world.

303
00:28:46.680 --> 00:28:51.720
Along with this, the United States pushed hard for the new launching of a new kind of

304
00:28:51.720 --> 00:28:59.080
World Paper Reserve, special drawing rights, SDRs, which it was hoped would eventually

305
00:28:59.080 --> 00:29:05.580
replace gold altogether and serve as a new world paper currency to be issued by a future

306
00:29:05.580 --> 00:29:08.100
World Reserve Bank.

307
00:29:08.100 --> 00:29:13.560
If such a system were ever established, then the United States could inflate unchecked for

308
00:29:13.560 --> 00:29:17.840
evermore in collaboration with other world governments.

309
00:29:17.840 --> 00:29:23.600
The only limit would then be the disastrous one of a worldwide runaway inflation and the

310
00:29:23.600 --> 00:29:26.800
crack-up of the world paper currency.

311
00:29:26.800 --> 00:29:32.880
But the SDRs, combated intensely as they have been by Western Europe and the hard money

312
00:29:32.880 --> 00:29:40.200
countries, have so far been only a small supplement to American and other currency reserves.

313
00:29:40.200 --> 00:29:45.760
All pro-paper economists, from Keynesians to Friedmanites, were now confident that gold

314
00:29:45.760 --> 00:29:49.600
Gold would disappear from the international monetary system.

315
00:29:49.600 --> 00:29:55.480
Cut off from its support by the dollar, these economists all confidently predicted, the free

316
00:29:55.480 --> 00:30:02.760
market gold price would soon fall below $35 an ounce, and even down to the estimated industrial

317
00:30:02.760 --> 00:30:07.160
non-monetary gold price of $10 an ounce.

318
00:30:07.160 --> 00:30:15.680
Instead, the free price of gold, never below $35, had been steadily above $35, and by early

319
00:30:15.680 --> 00:30:24.240
in early 1973 had climbed to around $125 an ounce, a figure that no pro-paper economist

320
00:30:24.240 --> 00:30:29.320
would have thought possible as recently as a year earlier.

321
00:30:29.320 --> 00:30:34.920
Far from establishing a permanent new monetary system, the two-tier gold market only bought

322
00:30:34.920 --> 00:30:37.560
a few years of time.

323
00:30:37.560 --> 00:30:40.600
American inflation and deficits continued.

324
00:30:40.600 --> 00:30:43.560
Eurodollars accumulated rapidly.

325
00:30:43.560 --> 00:30:49.000
World continued to flow outward, and the higher free market price of gold simply revealed

326
00:30:49.000 --> 00:30:53.480
the accelerated loss of world confidence in the dollar.

327
00:30:53.480 --> 00:31:02.640
The two-tier system moved rapidly toward crisis, and to the final dissolution of Bretton Woods.

328
00:31:02.640 --> 00:31:04.280
7.

329
00:31:04.280 --> 00:31:05.520
Phase 7.

330
00:31:05.520 --> 00:31:07.880
The End of Bretton Woods.

331
00:31:07.880 --> 00:31:15.240
Fluctuating Fiat Currencies August-December 1971

332
00:31:15.240 --> 00:31:22.200
On August 15, 1971, at the same time that President Nixon imposed a price wage freeze

333
00:31:22.200 --> 00:31:28.440
in a vain attempt to check bounding inflation, Mr. Nixon also brought the post-war Bretton

334
00:31:28.440 --> 00:31:31.880
Woods system to a crashing end.

335
00:31:31.880 --> 00:31:37.340
As European central banks at last threatened to redeem much of their swollen stock of dollars

336
00:31:37.340 --> 00:31:44.460
As for gold, President Nixon went totally off gold. For the first time in American history,

337
00:31:44.460 --> 00:31:51.860
the dollar was totally fiat, totally without backing in gold. Even the tenuous link with

338
00:31:51.860 --> 00:31:59.080
gold maintained since 1933 was now severed. The world was plunged into the fiat system

339
00:31:59.080 --> 00:32:06.000
of the thirties, and worse, since now even the dollar was no longer linked to gold. Ahead

340
00:32:06.000 --> 00:32:12.520
loomed the dread specter of currency blocks, competing devaluations, economic warfare,

341
00:32:12.520 --> 00:32:17.840
and the breakdown of international trade and investment, with the worldwide depression

342
00:32:17.840 --> 00:32:20.480
that would then ensue.

343
00:32:20.480 --> 00:32:22.280
What to do?

344
00:32:22.280 --> 00:32:27.960
Attempting to restore an international monetary order lacking a link to gold, the United States

345
00:32:27.960 --> 00:32:35.000
This led the world into the Smithsonian Agreement on December 18, 1971.

346
00:32:35.000 --> 00:32:37.260
8.

347
00:32:37.260 --> 00:32:38.400
Phase 8.

348
00:32:38.400 --> 00:32:46.160
The Smithsonian Agreement, December 1971 to February 1973.

349
00:32:46.160 --> 00:32:51.240
The Smithsonian Agreement, hailed by President Nixon as the greatest monetary agreement in

350
00:32:51.240 --> 00:32:56.720
the history of the world, was even more shaky and unsound than the gold exchange standard

351
00:32:56.720 --> 00:33:00.640
of the 1920s or then Bretton Woods.

352
00:33:00.640 --> 00:33:06.100
For once again, the countries of the world pledged to maintain fixed exchange rates,

353
00:33:06.100 --> 00:33:11.640
but this time with no gold or world money to give any currency backing.

354
00:33:11.640 --> 00:33:17.400
Furthermore, many European currencies were fixed at undervalued parities in relation

355
00:33:17.400 --> 00:33:18.960
to the dollar.

356
00:33:18.960 --> 00:33:24.720
The only United States concession was a puny devaluation of the official dollar rate to

357
00:33:24.720 --> 00:33:27.360
to $38 an ounce.

358
00:33:27.360 --> 00:33:33.420
But while much too little and too late, this devaluation was significant in violating an

359
00:33:33.420 --> 00:33:40.120
endless round of official American pronouncements, which had pledged to maintain the $35 rate

360
00:33:40.120 --> 00:33:42.120
for ever more.

361
00:33:42.120 --> 00:33:50.480
Now at last, the $35 price was implicitly acknowledged as not graven on tablets of stone.

362
00:33:50.480 --> 00:33:56.660
It was inevitable that fixed exchange rates, even with wider agreed zones of fluctuation,

363
00:33:56.660 --> 00:34:02.140
but lacking a world medium of exchange, were doomed to rapid defeat.

364
00:34:02.140 --> 00:34:07.960
This was especially true since American inflation of money and prices, the decline of the dollar

365
00:34:07.960 --> 00:34:12.520
and balance of payments deficits, continued unchecked.

366
00:34:12.520 --> 00:34:17.720
The swollen supply of euro dollars, combined with the continued inflation and the removal

367
00:34:17.720 --> 00:34:24.880
of Gold Banking, drove the free market gold price up to $215 an ounce.

368
00:34:24.880 --> 00:34:30.320
And as the overvaluation of the dollar and the undervaluation of European and Japanese

369
00:34:30.320 --> 00:34:36.560
hard money became increasingly evident, the dollar finally broke apart on the world markets

370
00:34:36.560 --> 00:34:41.640
in the panic months of February through March 1973.

371
00:34:41.640 --> 00:34:47.360
It became impossible for West Germany, Switzerland, France and the other hard money countries

372
00:34:47.360 --> 00:34:53.280
to continue to buy dollars in order to support the dollar at an overvalued rate.

373
00:34:53.280 --> 00:34:59.520
In little over a year, the Smithsonian system of fixed exchange rates without gold had smashed

374
00:34:59.520 --> 00:35:04.200
apart on the rocks of economic reality.

375
00:35:04.200 --> 00:35:06.600
9.

376
00:35:06.600 --> 00:35:08.320
Phase 9.

377
00:35:08.320 --> 00:35:10.320
Fluctuating Fiat Currencies.

378
00:35:10.320 --> 00:35:14.340
March 1973 to…

379
00:35:14.340 --> 00:35:21.540
With the dollar breaking apart, the world shifted again to a system of fluctuating fiat currencies.

380
00:35:21.540 --> 00:35:26.920
Within the West European Bloc, exchange rates were tied to one another, and the United States

381
00:35:26.920 --> 00:35:33.500
again devalued the official dollar rate by a token amount to $42 an ounce.

382
00:35:33.500 --> 00:35:38.840
As the dollar plunged in foreign exchange from day to day, and the West German Mark,

383
00:35:38.840 --> 00:35:42.760
The Swiss franc and the Japanese yen hurtled upward.

384
00:35:42.760 --> 00:35:48.040
The American authorities, backed by the Friedmanite economists, began to think that this was the

385
00:35:48.040 --> 00:35:50.120
monetary ideal.

386
00:35:50.120 --> 00:35:55.840
It is true that dollar surpluses and sudden balance of payments crises do not plague the

387
00:35:55.840 --> 00:35:58.920
world under fluctuating exchange rates.

388
00:35:58.920 --> 00:36:04.540
Furthermore, American export firms began to chortle that falling dollar rates made American

389
00:36:04.540 --> 00:36:09.020
and goods cheaper abroad and therefore benefited exports.

390
00:36:09.020 --> 00:36:14.820
It is true that governments persisted in interfering with exchange fluctuations, dirty instead of

391
00:36:14.820 --> 00:36:20.660
clean floats, but overall it seemed that the international monetary order had sundered

392
00:36:20.660 --> 00:36:23.940
into a Friedmanite utopia.

393
00:36:23.940 --> 00:36:29.300
But it became clear all too soon that all is far from well in the current international

394
00:36:29.300 --> 00:36:31.300
monetary system.

395
00:36:31.300 --> 00:36:36.700
The long-run problem is that the hard money countries will not sit by forever and watch

396
00:36:36.700 --> 00:36:41.980
their currencies become more expensive and their exports hurt for the benefit of their

397
00:36:41.980 --> 00:36:44.320
American competitors.

398
00:36:44.320 --> 00:36:50.540
If American inflation and dollar depreciation continues, they will soon shift to the competing

399
00:36:50.540 --> 00:36:58.120
devaluation, exchange controls, currency blocks and economic warfare of the 1930s.

400
00:36:58.120 --> 00:37:03.480
But more immediate is the other side of the coin. The fact that depreciating dollars means

401
00:37:03.480 --> 00:37:10.120
that American imports are far more expensive, American tourists suffer abroad, and cheap

402
00:37:10.120 --> 00:37:15.920
exports are snapped up by foreign countries so rapidly as to raise prices of exports at

403
00:37:15.920 --> 00:37:23.060
home. For example, the American wheat and meat price inflation. So that American exporters

404
00:37:23.060 --> 00:37:29.820
Futures might indeed benefit but only at the expense of the inflation-ridden American consumer.

405
00:37:29.820 --> 00:37:34.900
The crippling uncertainty of rapid exchange rate fluctuations was brought starkly home

406
00:37:34.900 --> 00:37:40.180
to Americans with the rapid plunge of the dollar in foreign exchange markets in July

407
00:37:40.180 --> 00:37:43.020
1973.

408
00:37:43.020 --> 00:37:49.780
Since the United States went completely off gold in August 1971 and established the Friedmanite

409
00:37:49.780 --> 00:37:56.080
fluctuating fiat system in March 1973, the United States and the world have suffered

410
00:37:56.080 --> 00:38:01.340
the most intense and most sustained bout of peacetime inflation in the history of the

411
00:38:01.340 --> 00:38:02.780
world.

412
00:38:02.780 --> 00:38:07.140
It should be clear by now that this is scarcely a coincidence.

413
00:38:07.140 --> 00:38:11.820
Before the dollar was cut loose from gold, Keynesians and Friedmanites, each in their

414
00:38:11.820 --> 00:38:19.020
own way devoted to fiat paper money, confidently predicted that when fiat money was established,

415
00:38:19.020 --> 00:38:25.100
The market price of gold would fall promptly to its non-monetary level, then estimated

416
00:38:25.100 --> 00:38:27.780
at about $8 an ounce.

417
00:38:27.780 --> 00:38:32.940
In their scorn of gold, both groups maintained that it was the mighty dollar that was propping

418
00:38:32.940 --> 00:38:36.940
up the price of gold, and not vice versa.

419
00:38:36.940 --> 00:38:44.260
Since 1971, the market price of gold has never been below the old fixed price of $35 an ounce,

420
00:38:44.260 --> 00:38:48.220
and has almost always been enormously higher.

421
00:38:48.220 --> 00:38:55.060
Even during the 1950s and 1960s, economists such as Jacques Ruff were calling for a gold

422
00:38:55.060 --> 00:38:58.420
standard at a price of $70 an ounce.

423
00:38:58.420 --> 00:39:01.500
The price was considered absurdly high.

424
00:39:01.500 --> 00:39:04.900
It is now even more absurdly low.

425
00:39:04.900 --> 00:39:10.460
The far higher gold price is an indication of the calamitous deterioration of the dollar

426
00:39:10.460 --> 00:39:17.140
since modern economists had their way and all gold backing was removed.

427
00:39:17.140 --> 00:39:23.220
It is now all too clear that the world has become fed up with the unprecedented inflation

428
00:39:23.220 --> 00:39:28.220
in the United States and throughout the world that has been sparked by the fluctuating fiat

429
00:39:28.220 --> 00:39:32.560
currency era inaugurated in 1973.

430
00:39:32.560 --> 00:39:37.900
We are also weary of the extreme volatility and unpredictability of currency exchange

431
00:39:37.900 --> 00:39:39.380
rates.

432
00:39:39.380 --> 00:39:44.540
This volatility is the consequence of the national fiat money system, which fragmented

433
00:39:44.540 --> 00:39:50.380
the world's money and added artificial political instability to the natural uncertainty in

434
00:39:50.380 --> 00:39:52.960
the free market price system.

435
00:39:52.960 --> 00:39:58.660
The Friedmanite dream of fluctuating fiat money lies in ashes and there is an understandable

436
00:39:58.660 --> 00:40:04.580
yearning to return to an international money with fixed exchange rates.

437
00:40:04.580 --> 00:40:09.980
Unfortunately the classical gold standard lies forgotten and the ultimate goal of most

438
00:40:09.980 --> 00:40:15.380
For East American and world leaders is the old Keynesian vision of a one-world fiat paper

439
00:40:15.380 --> 00:40:23.580
standard, a new currency unit issued by a World Reserve Bank, WRB. Whether the new currency

440
00:40:23.580 --> 00:40:30.340
be termed the Bancor, offered by Keynes, the Unita, proposed by World War II United States

441
00:40:30.340 --> 00:40:37.780
Treasury official Harry Dexter White, or the Phoenix, suggested by The Economist, is unimportant.

442
00:40:37.780 --> 00:40:43.580
The vital point is that such an international paper currency, while indeed free of balance

443
00:40:43.580 --> 00:40:49.620
of payments crises since the WRB could issue as many bankers as it wished and supply them

444
00:40:49.620 --> 00:40:56.540
to its country of choice, would provide for an open channel for unlimited worldwide inflation

445
00:40:56.540 --> 00:41:02.900
unchecked by either balance of payments crises or by declines in exchange rates.

446
00:41:02.900 --> 00:41:08.620
The W.R.B. would then be the all-powerful determinant of the world's money supply and

447
00:41:08.620 --> 00:41:10.860
its national distribution.

448
00:41:10.860 --> 00:41:17.900
The W.R.B. could and would subject the world to what it believes will be a wisely controlled

449
00:41:17.900 --> 00:41:18.900
inflation.

450
00:41:18.900 --> 00:41:24.340
Unfortunately, there would then be nothing standing in the way of the unimaginably catastrophic

451
00:41:24.340 --> 00:41:29.200
economic holocaust of worldwide runaway inflation.

452
00:41:29.200 --> 00:41:36.800
Banking that is, except the dubious capacity of the WRB to fine tune the world economy.

453
00:41:36.800 --> 00:41:42.900
While a worldwide paper unit and central bank remain the ultimate goal of the world's Keynesian

454
00:41:42.900 --> 00:41:49.400
oriented leaders, the more realistic and proximate goal is a return to a glorified Bretton Woods

455
00:41:49.400 --> 00:41:55.740
scheme, except this time without the check of any backing in gold.

456
00:41:55.740 --> 00:42:00.460
Currently the world's major central banks are attempting to coordinate monetary and

457
00:42:00.460 --> 00:42:06.740
economic policies, harmonize rates of inflation and fix exchange rates.

458
00:42:06.740 --> 00:42:12.780
The militant drive for a European paper currency issued by a European central bank seems on

459
00:42:12.780 --> 00:42:15.100
the verge of success.

460
00:42:15.100 --> 00:42:20.340
This goal is being sold to the gullible public by the fallacious claim that a free trade

461
00:42:20.340 --> 00:42:28.260
European Economic Community, EEC, necessarily requires an overarching European bureaucracy,

462
00:42:28.260 --> 00:42:35.220
a uniformity of taxation throughout the EEC, and, in particular, a European central bank

463
00:42:35.220 --> 00:42:37.420
and paper unit.

464
00:42:37.420 --> 00:42:42.780
Once that is achieved, closer coordination with the Federal Reserve and other major central

465
00:42:42.780 --> 00:42:45.480
banks will follow immediately.

466
00:42:45.480 --> 00:42:49.500
And then, could a world central bank be far behind?

467
00:42:49.500 --> 00:42:55.340
Short of that ultimate goal, however, we may soon be plunged into yet another Bretton Woods,

468
00:42:55.340 --> 00:43:00.320
with all the attendant crises of the balance of payments and Gresham's Law that follow

469
00:43:00.320 --> 00:43:05.860
from fixed exchange rates in a world of fiat monies.

470
00:43:05.860 --> 00:43:10.420
As we face the future, the prognosis for the dollar and for the international monetary

471
00:43:10.420 --> 00:43:13.420
system is grim indeed.

472
00:43:13.420 --> 00:43:19.380
Until and unless we return to the classical gold standard at a realistic gold price, the

473
00:43:19.380 --> 00:43:24.860
The international monetary system is fated to shift back and forth between fixed and

474
00:43:24.860 --> 00:43:31.580
fluctuating exchange rates, with each system posing unsolved problems, working badly,

475
00:43:31.580 --> 00:43:34.260
and finally disintegrating.

476
00:43:34.260 --> 00:43:39.860
And fueling this disintegration will be the continued inflation of the supply of dollars

477
00:43:39.860 --> 00:43:45.020
and hence of American prices, which show no sign of abating.

478
00:43:45.020 --> 00:43:50.460
The prospect for the future is accelerating and eventually run away inflation at home

479
00:43:50.460 --> 00:43:56.240
accompanied by monetary breakdown and economic warfare abroad.

480
00:43:56.240 --> 00:44:02.140
This prognosis can only be changed by a drastic alteration of the American and world monetary

481
00:44:02.140 --> 00:44:09.460
system, by the return to a free market commodity money such as gold, and by removing government

482
00:44:09.460 --> 00:44:11.700
totally from the monetary scene.