The Essence of Liberty #187, IV. The Monetary Breakdown of the West

The Essence of Liberty : Part 187 (1) Compiled by  Dr. Jimmy T. (Gunny) LaBaume  A Summary of: What Has Government Done to Our Money by Murray N. Rothbard by Jimmy T. LaBaume and Toni Jolin. (The complete book is available for download at http://www.mises.org/money.asp ) IV. The Monetary Breakdown of the West   Bretton Woods and the New Gold Exchange Standard 1945-1968 This new system was essentially the gold-exchange standard of the 1920s but with the dollar replacing the British pound as the “key currency.” No private individuals, only governments, were to be allowed to redeem dollars in the world gold currency. The uS started the post-war period with a very large stock of gold. Therefore, there was plenty of play for pyramiding dollar claims on top of it. Furthermore, the system was able to “work” for a while because all the world’s currencies returned to their pre-WWII pars and most of these pars were highly overvalued due to their inflated and depreciated currencies. The result was an artificial undervaluation of the dollar and an undervaluation of most of the world’s other currencies. This made the dollar scarce and resulted in a “dollar shortage.” Ultimately the hapless American taxpayer was forced to make this up in the form of foreign aid. Throughout the 1950s and 1960s the harder-money countries of West Europe became nervous about being forced to accumulate increasingly overvalued dollars. As the value of the dollar fell, it became increasingly unwanted by foreign governments and the gold standard check came into use. During the two decades after the early 1950s, Gold flowed out of the US and its gold stock fell drastically. The Unraveling of Bretton Woods, 1968-1971 The dollar kept inflating and depreciating and American balance of payments deficits continued. As this happened, Europeans (and other private citizens) started accelerating their sales of dollars into gold. As a result, in order to keep the dollar at $35 an ounce, the uS government was forced to leak gold from its ever dwindling stock to support the $35 price in London and Zurich. Then, in 1968, a crises of confidence in the dollar caused the uS to implement a fundamental change in the monetary system. The idea of the “two-tier” gold market was hatched. Henceforth and forevermore, the uS would ignore the free market price for gold no longer try to keep it at $35. Instead, it and other governments agreed to keep the value of the dollar at $35. In addition, the uS pushed hard for a new world paper currency to be issued by a future World Reserve Bank. The hope was that this new paper would eventually replace gold altogether. Now that gold was cut off from its “support” by the dollar, the pro-paper economists were confident that it would disappear from the international monetary system. They predicted that the free-market gold price would soon fall below $35 and even down to the estimated “industrial” (non-monetary) price of $10 an ounce. But American inflation and deficits continued as did the outflow of gold and the two-tier system moved rapidly toward crises. The End of Bretton Woods: Fluctuating Fiat Currencies, 1971 In 1971 President Nixon took the uS completely off the gold standard. For the first time in American history, the dollar was totally fiat—i.e. with absolutely no backing in gold. Then, in an attempt to restore an international monetary order without a link to gold, the uS led the world into the Smithsonian Agreement. The Smithsonian Agreement, 1971-1973 The Smithsonian Agreement was even more shaky and unsound than the gold-exchange standard of the 1920s. As in the 1920s, the countries of the world pledged to maintain fixed exchange rates—but this time with no gold or world money to back any currency. The agreed upon fixed exchange rates had wide zones of fluctuation. But, a medium of world exchange was lacking. Thus, it was inevitable that fixed exchange rates were doomed to defeat. This was especially true since inflation and balance of payments deflects continued unchecked in America. Fluctuating Fiat Currencies, 1973-? With the dollar breaking apart, the world shifted again, to a system of fluctuating fiat currencies. It is true that dollar surpluses and sudden balance of payments crises do not plague the world under fluctuating exchange rates. Furthermore, falling dollar rates benefited exports by making American goods cheaper abroad. But the he long-run problem is that other countries will not sit idly by and watch their currencies become more expensive and tolerate their exports being hurt for the benefit of their American competitors. Then there is the other side of the coin. The depreciating dollar makes American imports more expensive. American tourists suffer abroad and cheap exports are snapped up by foreign countries so rapidly as to raise prices of exports at home. Since the uS went off the gold standard in 1971, it and the rest of the world have suffered the most intense and sustained peace-time inflation in the history of the world. The gold market price has never been below the old fixed price of $35 and has almost always been much higher than that. This higher gold price indicates the catastrophic deterioration of the dollar since “modern” economists had their way and all gold backing was removed. Currently currency exchange rates are extremely volatile and unpredictable—a direct consequence of fiat money. This system has fragmented the world’s money and added artificial political instability to the natural uncertainty in the free-market price system. Unfortunately, the gold standard seems to have been forgotten. The ultimate goal of most world leaders is a one-world fiat paper standard. It is true that any such an international paper currency would indeed be free of balance of payments crises. However, any such World Reserve Bank could issue as much of the world currency as it wished and supply it to its country of choice. This would be an invitation to unlimited world-wide inflation—unchecked by either balance of payments crises or by declines in exchange rates. The future of the international monetary system looks grim indeed. Until we return to the classical gold standard, the international money system will continue to shift back and forth between fixed and fluctuating exchange rates. Each system each system will continue to pose unsolved problems and ultimately disintegrate. American prices will show no sign of abating since inflation of the dollar will fuel these disintegrations. All the future will hold is accelerating and eventually runway inflation at home and monetary breakdowns and economic warfare aboard. This prognosis can only be changed by a return to a free market commodity money such as gold and by removing government totally from the monetary sphere. Next Previous Copyright ©2004, FlyoverPress.com Jimmy T. LaBaume, PhD, ChFC is a full professor teaching economics and statistics in the School of Agricultural and Natural Resource Sciences, Sul Ross State University, Alpine, TX. He does not speak for Sul Ross State University. Sul Ross State University does not think for him. Dr. LaBaume has lived in Mexico and spent extended periods of time in South and Central America as a researcher, consultant and educator. “Gunny” LaBaume is a decorated veteran of the Vietnam War and Desert Storm. His Marine Corps career spanned some 35 years intermittently from 1962 until 1997 when he refused to re-enlist with less than 2 years to go to a good retirement. In his own words, he “simply got tired of being guilty of treason.” He is also currently the publisher and managing editor of FlyoverPress.com, a daily e-source of news not seen or heard anywhere on the mainstream media. He can be reached at jlabaume@sulross.edu. Permission is granted to forward as you wish, circulate among individuals or groups, post on all Internet sites and publish in the print media as long as the article is published in full, including the author’s name and contact information and the URL www.flyoverpress.com. FlyoverPress.com can be contacted at editor@flyoverpress.com *Note: We hold no special government issued licenses or permits. We don’t accept government subsidies, bailouts, low-cost loans, insurance, or other privileges. We don’t lobby for laws that hurt our competitors. We actively oppose protectionism and invite all foreign competitors to try to under price us. We do not lobby for tariffs, quotas, or anti-dumping laws. We do not support the government’s budget deficits: we hold no government or agency securities. HOME E-mail To Subscribe to our daily e-mail alert service, send an e-mail with the word “subscribe” on the subject line.

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