“Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich.”
The Restaurant At The End of The Universe, Douglas Adams
Post World War II, there was a system known as Bretton Woods, which was the last remains of the pre-war gold standard. Under this system, US dollars were convertible into gold, and the dollar acted as the worlds reserve currency. Bretton Woods had many flaws, not least the greater inflation it allowed compared to the pre-war standard, but it could be argued that at least it was planned before being implemented. The current system we have has no such defence.
Over time, the US gold reserves dwindled, and selling them at the agreed fixed price of $35 an ounce was no longer possible. The date 15th August 1971 isn’t one that is terribly well known, but it’s a key date in the economic history of the world. On this date, Richard Nixon effectively ended the Bretton Woods system by declaring that the US would no longer honour the agreements and stopped selling the gold. Despite all the focus on the Watergate scandal, this act of Nixon’s administration has had far wider and longer-lasting consequences.
Fiat currency is now global – there is nothing backing up the money supply, and central banks can inflate to their hearts content. Individual countries had experimented with fiat currencies in the past but this has never happened before on a global scale. Economists now love to talk about how we can’t go back to the gold standard – but our current system wasn’t planned or debated, it wasn’t voted on by politicians nor by the people in a referendum. The fundamental basis of our economy, money, was decided by an executive decision.
As Detlev Schlichter explains in Paper Money Collapse, no fiat (or “paper” money) system has ever been successful long term. They have either collapsed in chaos, or a decision was taken to revert to some form of commodity based money before things got out of hand. Throughout nearly all of human history, gold or silver has been used as money. Are we arrogant enough to think that our worldwide experiment with fiat money will last? In the 42 years it has so far lasted, we have had many financial crises, an ever growing pile of debt (both private and government), and the highest sustained inflation ever seen.
The pound sterling has lost 90% of its value since 1971. And this is the system economists tell us is the best one?