A Century Unique In All History
This last century is unique in all of history, as it tells the story of the first time in all of history, that gold has been completely and officially abandoned as the backing for money.
We have said before that maintaining control of the financial systems is the largest single challenge facing the leaders of the world today. This is evidenced in the last two years by the record number of summits and emergency meetings of organizations such as IMF, World Bank, World trade Organization, and the G7. The Plunge Protection Team and Exchange Stabilization Fund have been working overtime, while we have witnessed the setting up and convening of special sub committees of central banks and governmental policy makers, all dedicated to ensuring stability of financial and capitol markets, at all costs.
Since 1997 we have seen the Asian crisis, the Russian crisis and the Brazilian crisis. Each of these close catastrophes were met with immediate and decisive action by the global financial power brokers. While not yet devastating, this year we have watched the Euro and Australian and New Zealand dollars all take a hiding on international markets. These crisis, or near crisis, have all had one thing in common, and that is that it has been the currencies of these regions, or nations, that have collapsed in value.
The Floating Era
We are living in the Floating Currency Era. Today the value of a nation’s currency is based on its trading level against the world’s reserve currency, the US dollar. This trading relationship is primarily determined by capitol flows in and out of the nation, as a result of several factors, including the nation’s trading surplus or deficits and international investor sentiment.
If nation exports more to the rest of the world than it imports, it on net it brings back more foreign funds than it spends.
Likewise, if international investors, whether private or institutional, see the nation as a good place to invest, they will send funds into the nation to purchase all kinds of assets. All these inflow of funds will bid up the price of that nation’s currency.
Alternatively, if a nation is running trading deficits with the rest of the worlds, it will be spending more than it is earning, therefore bringing home less oversees capitol. Again if the international investment community view the nation to be a poor risk, they will sell off assets held in that nation and pull the funds out. This net outflow of funds will weaken the currency in the international market place. Like any market, the lower the nation’s currency falls, the quicker more and more funds will be pulled out, sending the embattled nation’s currency into an exponential nose dive. To compound the situation, the lower the currency trades against other currencies, the more expensive essential imports (such as crude oil and food) will become for that nation.
Today there are nearly 200 nations, most of them with a national currency that floats against the US dollar in the international market place. For many people alive today, floating currencies are quite normal; that is all they can remember. In March of 1973 when the Floating Currency Era first began, I was a boy of just 11. The massive, and in many cases, impoverishing fluctuations in nations currencies are the result of three progressive changes in international monetary policy over the last 100 hundred years.
Turning Back the Clock
At the beginning of the 20th century, the world was enjoying wealth and prosperity; the result of over 100 years of Industrial Revolution, that had ushered in an age of increased productivity, through improved manufacturing and a higher specialized division of labor. Internationally and domestically, a solid and stable monetary exchange system was in place called the Classic Gold Standard. Within the individual economies of the world, gold and silver coinage still circulated, along side banknotes. Operating like gold certificates, these paper banknotes were exchangeable on demand for physical gold.
As with any monetary system in an imperfect world, the Classic Gold Standard had it own set of problems. Opponents of the gold standard argued that money supply backed by a commodity such as gold could not grow quickly enough to keep up with the rapid growth in goods and services in industrialized nations. For money supply to expand under a gold standard requires further stocks of gold to be mined from the ground. However, once mined, new gold supply entered the market and carried with it no inherent dept, requiring ongoing interest payments like our money supply of today.
At the turn of last century, dramatic improvements in shipping had seen international markets open up like never seen before in history. For the first time, freighting produce and goods across the globe had become reliable and relatively inexpensively. Under the Gold Standard, the prices of all these goods and services traded across international waters were measured in ounces of gold. If a nation ran a trade deficit with the rest of the world, it had to pay its Current Account Deficit in ounces of gold, and if a nation exported more than it imported, it was paid in gold.
The Winds of Change
With the outbreak of World War One, international trade virtually ceased. With the resumption of international trade after the Great War, a new international system started to emerge. In 1922, the major economies of the world, still recovering from the effects of WW1, meet in Genoa, Italy in an attempt to return order to a war ravaged global economy.
Post Genoa, for the first time saw the start of “reserve currencies”, where both the British Pound and the US Dollar were accepted along side physical gold for the settlement of international trade. In 1922 both the British Pound and the US dollar were exchangeable for gold. Now called the Gold Exchange Standard, nations started to hold both the British Pound and the US dollar, along side gold, as reserves required for international trade.
The use of “Special Drawing Rights” or SDR’s saw massive inflation in international monetary reserves between 1922 and the early 1930’s, paving the way for the boom bust cycle that lead the world into the Great Depression.
Going Off Gold
In 1931, at the beginning of the Great Depression, Britain abandoned the Pound’s pegging to gold. In the early 1930’s the US dollar was still convertible to gold at US$20 to the ounce. In 1933 in the midst of the Great Depression, President Franklin D Roosevelt outlawed the private ownership of gold by US citizens, and withdrew gold coinage in circulation. The US dollar was then revalued from $20 to $35 per ounce, and for the next 38 years US citizens were outlawed from legally owning gold.
Later in the 1930’s Europe slid into the Second World War. In 1944, as the Second World War was drawing to a close, the Bretton Woods Conference saw the US dollar emerge as the sole reserve currency of the world. From this point on neither gold, nor the British pound, were used or accepted in settlement for international trade. Nation’s currencies were pegged to the US dollar, which in turn was pegged to gold at $35 per oz. The International Monetary Fund was established to regulate the exchange rates between nation’s currencies and the US dollar.
Up until 1971, the world’s reserve currency remained convertible to gold. Foreign treasuries and central banks had the option to take their US dollars, earned through international trade, and convert them to gold at US $35 per ounce. In August that year the last remaining remnant of the gold standard disappeared when the US dollars convertibility to gold was removed. From that point on, for the first time in all of 6000 years of history, the currencies of the entire world were not in any way attached to gold.
1973 saw the start of the Floating Currency Era. As already discussed, from this point on, the currencies of nations began to fluctuate, often wildly, within the open market. As seen in recent years, the lively hood of hundreds of millions of people could be effected literally overnight as currencies traded against each other without any stable commodity backing. Throughout this era, central banks and government treasuries have desperately tried to manage their currencies in the market place through interest rate adjustments, credit or money supply expansion and even directly market intervention.
No-one can truly measure or describe the hardship and suffering, either individually or nationally, caused by many of these devastating currency gyrations and devaluation’s.
Throughout the century that saw the unraveling of sound currency, there have been many notable economists that have called for the re-instatement of a stable commodity backed international monetary system.
The Last Say
Even as recently as the early 1980’s Dr. Alan Greenspan himself said that a return to the gold standard would be the only way to stabilize the global monetary and financial systems.
This last century is unique in all of history, as it tells the story of the first time in all of history, that gold has been completely and officially abandoned as the backing for money. Clearly, the further the currencies of nations have been removed from the stabilizing effects of gold, the greater the upheavals and gyrations experienced in international financial infrastructures.
Meanwhile, gold has continued to quietly operate in the background as the only free market money in the world. Professor Steve Hanke said before a Senate Banking Committee hearing in April “Although sound money may not be everything, everything is nothing without it”.
by Philip Judge