“As good as gold.”
A half century ago we all (unwittingly) became subjects in a vast global experiment, the outcome of which is still in doubt. August 15, 2021 marks the 50th anniversary of one of the most significant events in global financial history, though one which will probably go unnoticed outside a rarefied cadre of (mostly older) economists. On that date, President Richard Nixon, in a surprise move originating from a top-secret meeting at Camp David, took the United States off the gold standard, severing the ability of foreign governments to exchange their dollars with the U.S. at a fixed rate of $35 per ounce and launching us into the uncharted waters of unlimited fiat currency. Also, as a result of the “freeing” of the dollar, the fixed-exchange rate mechanism pegging all currencies to the dollar that was established at Bretton Woods in 1944 ended, creating a system of (mostly) free-floating exchange rates.
The results of these changes in the old post-war order have been far reaching. As the supply of credit became untethered from the relatively fixed supply of gold, global economic growth soared. All the gold found and mined in human history (about 6 billion ounces) is only worth $210 billion at $35 per ounce – that’s only 1% of current U.S. GDP! This limitation was the driver behind Nixon’s decision; in 1971 the U.S. Treasury held only enough gold to redeem a quarter of the dollar reserves held by foreign governments, so remaining on the gold standard was impossible unless we were prepared to undergo another Great (or Greater) Depression. If we could have remained on the gold standard, we would all be much poorer today as a result.
However, there have been negative consequences as well. After a relatively stable economic era, both in the U.S. and globally, between 1945 and 1970, economic crises have become more frequent. The 1973-74 bear market was one of the worst in history, with the S&P 500 dropping over 50% and marking the first time in over a generation that the market declined in consecutive years. Severe inflation and soaring interest rates followed (remember 18% 30-year mortgage rates?) and we had to endure a sharp recession (engineered by the Volcker-led Fed in 1980) to get them under control. Other “bubbles” resulting from easy credit (dot.com stocks in the 90s and housing in the 00s, for example) also led to steep (>50%) market declines. Debt, both sovereign and private, has exploded. The U.S. now has a debt/GDP ratio above 100% (and climbing fast) for only the second time in history, the other being right at the end of World War II.
So, the “experiment” continues and no one knows how it will turn out. How much can we borrow? Many today act as if the credit well is unlimited, but somehow that doesn’t seem right. The gold standard was an unsustainable rein on economic growth, but the current regime is also flawed. Let’s hope we can find a stable middle ground without too much economic pain. That would indeed be a future “as good as gold”.
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