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The End of the Gold Standard: 50 Years On

Author: Jon Clarke - Bullion & Economics Editor

Published: 17 Aug 2021

Last Updated: 20 Oct 2021

Synopsis

The 15th August 2021 marked the 50th Anniversary since US President Richard Nixon closed the gold window, bringing to an end the last connection the world had to the gold standard, and ushering in a "paper" standard.

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Bretton Woods 1944-1971

The first half of the 20th century took its toll on many economies. After a devastating world war, periods of hyperinflation, the Great Depression, the rise of fascism and yet another world war, the world governments looked to establish a new international monetary system.

The so-called Bretton Woods Agreement, named after the area at which the conference took place was similar in some respects to the gold standard which came before except instead of currencies being pegged to gold, they were instead pegged to the US dollar which was itself pegged to gold at 1/35th of a troy ounce. This made sense due to the US gold stock of $25 billion. Gold could now only be redeemed by central banks and governments following Franklin D Roosevelt’s Executive Order 6102 which restricted US citizen’s gold holdings.

As many other currencies were overvalued after WWII, the now undervalued dollar became scarce which led to a dollar shortage and the necessity for the Federal Reserve to inflate its money stock. The US continued to inflate their dollars, it became more and more overvalued, which led to many countries redeeming their dollars for gold, so much so that by the 1960s, the amount of gold stored by the US was halved.

Eventually, to prevent further runs on gold, US President Richard Nixon reneged on its obligations by “temporarily” preventing gold redemption and bringing an end to Bretton Woods. 

After Bretton Woods

After the Nixon Shock of 1971, yet another monetary system was needed. The short-lived Smithsonian Agreement, which relied on fixed exchange rates with no gold ties fell apart in little over a year, the world’s governments turned to a system of fluctuating exchange rates.

The dollar retained its status as the world’s reserve currency, a status it had been granted under Bretton Woods, despite contention from other countries. The French Minister of Finance, and later President Valéry Giscard d'Estaing, for example said in the 1960s the dollar had an “exorbitant privilege”.

US. Debt

Under this privilege, the idea of holding US debt, by way of US treasury bonds becomes much more attractive. As more and more countries start buying treasuries, the easier it is for the US to issue more debt, and at increasingly lower rates.

This goes in some way to explain who US debt has increased from just $398 million in 1971 to an eye-watering $27 trillion in 2020. The debt-to-GDP which stood at 34% in 1971 has now increased to 129% and is expected to reach 180% in 2050. 

Productivity and Wages

An Economic Policy Institute report shows the widening gap between productivity and worker’s compensation. From 1948, productivity and compensation stayed more or less equal. In the years following the Bretton Woods collapse, a gap developed between the two factors and by 2020 productivity had risen 258.4% while compensation only rose 128.5%.

Income Growth

A report by Zero Hedge looked at income growth from 1917 to 2012 for the top 1% of earners compared with the bottom 90%. From 1940 up until the 1970s, the bottom 90% saw their income increase 200% while the top 1% saw in increase of around 5-10% over the same period. It wasn’t until the early-mid 80s, when the 1%ers saw their income increase nearly 250% over the next 20 years while incomes at the lower end more-or-less stagnated. 

Summary

These numbers may of course be coincidental; but it would be difficult not to notice the ever-increasing deficits and continual government spending from politicians of all stripes on BOTH sides of the Atlantic.

It is sometimes said that the “rules” of the gold standard helped to reign in excessive government spending. In truth, this is all dependent on whether or not a government wishes to play by these rules or create their own. Unfortunately, the move away from the gold standard only helped to preserve government interests while the middle and lower classes see their savings eroded and real income reducing through inflation.

Fifty years since the world severed its link to the gold standard and we’ve seen the value of currencies like the pound and dollar fall dramatically. Gold on the other hand, despite some fluctuations has increased in the long term.

It’s worth wondering what will happen to gold in the next 50 years, but if the last 50 is anything to go by, then there is something to be said for a precious metal that has been around for thousands of years and still retains value despite the efforts of a few who wish to see it removed from the market entirely. On the other hand, with a more technologically advanced society, will there be a move to a centralised digital currency that has been proposed by some central banks or to a more market based digital currency like Bitcoin or Ethereum?

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