The barbarous relic is not gold; gold is the one who got away. Today marks the 40th anniversary that the US divorced itself from the gold standard in 1971, then known as the Breton Woods system. This system—one of backing a nation’s currency by a finite resource—was argued as being the most sound monetary system available, as it prevented the US from creating infinite money at will. That is, every dollar had to be backed by a certain ratio of gold, which was stored in vaults. In the aftermath of World War II, international currencies were tied to the US dollar, which was itself backed by gold.
This gold standard, heralded by Austrian economists, worked as a natural restriction on overextension of the money supply, which was precisely why Nixon nixed it in 1971 as President Johnson’s Great Society programs and the Vietnam War gave the US deficits and raised concern that there would soon be a run on gold. This pressure, combined with a long history of bankers who were trying to take control of the US monetary system by destroying the gold standard, likely “helped” Nixon make the final blow. Quick to adopt the Keynesian economic model, which indirectly supports the notion of creating money out of thin air (backed by debt), Nixon heralded the modern era of fiat currency—and nearly every country has followed. The result is well-illustrated in the following graph:
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