The Bretton Woods Agreement tacked international currencies to a gold standard, but Nixon closed the “gold loop” to prevent foreign banks from exchanging our U.S. dollars for gold, thereby leaving us with nothing but paper and a bunch of empty vaults.
I have some questions about this withdrawal from the international gold standard:
(1) Was the above problem really a problem, or did people just not like the idea of gold leaving the country? If the increased exiting of gold from the U.S. was a problem, what could have been done to prevent this? Would getting rid of the dollar currency have helped?
(2) Why has the U.S. economy been able to go on for so long on a purely fiat-currency? The impression I am under is that the U.S. dollar became like gold to the rest of the world because of our economic strength, and therefore somehow we were able to avoid any negative side-effects that the dollar standard brought with it. However, with the U.S. economy oscillating wildly, the dollar becomes “de-valued” in the minds of foreign powers and in turn the U.S. dollar loses its value → defacto inflation?
Could somebody clue me in on these topics? I’m sure there are specific writings that address them, but I’m not aware of them.
It was really a problem. The guns-and-butter approach of '63 onward had created a serious inflation problem. The US government was bankrupt, and Nixon de facto admitted it.
Read Rothbard’s What Has Government Done To Our Money.
The Bretton-Woods system was an unsustainable attempt to fix gold at $35.00 through the manipulation of the London gold market by central banks; a daily article recently analyzed this problem: “The Loosing Battle to Fix Gold at $35”.
The strength of the fiat dollar depends on holders’ trust in both the monetary policy of the US government as well as the economic strength of the American economy. Without a doubt, the American economy has been the strongest economy for a while hence the confidence in the value of the dollar that has supported it as a currency.
Thank you everyone for the responses. It looks like almost everything there is to wonder about is answered in Rothbard’s book. [:)] Ach, so much to read…
Ignoring for the moment that the fiat-dollar is easily undermined by continual printing, interest-rate manipulation, and fractional-reserve banking (right?), is it fair to say that any fiat-dollar system would be unstable simply because it is so dependent on the economic opinions of outsiders? If a (God forbid) global fiat-dollar system were to be implemented, would this single aspect of instability disappear, or would it appear in another form? Evidence for or against? Again, I’m ignoring for the moment the other mechanisms that cause such a system to be worthless.