The Gold Standard

To understand the ongoing turmoil in the financial markets, it is necessary to look back 70 respectively 43 years. On 15 August 1971, the then US President Richard Nixon laid the foundation for today's economic system by abolishing the connection of the dollar to gold, thus ending the international monetary system that had been settled in Bretton Woods in the year 1944. By 1971, the price of gold per fine ounce was set at $ 35. In a televised address to the American people he let the rest of the world unmistakable know that the United States would refuse from this day on, any time to redeem the dollar against a fixed quantity of the noble metal. Up to this day it was possible for everyone to exchange 35$ against one fine ounce (31, 1 gram) of gold. With this step, Nixon had canceled this historic gold standard in August 1971, he justified this drastic step with speculations against the United States. It seems implausible, that Nixon and his advisers were not already aware of the disastrous implications for the global monetary system at this time. The real reason was that the US had taken over financially by the wars in Korea and Vietnam, to ensure the funding, too many dollars were put into circulation. The rest of the world no longer believed that the United States had their debt still in the grip, the global confidence in the reserve currency waned, many central banks exchanged their dollar reserves in gold, first of all France. This created a new threat to the United States, the long-term sale of US gold reserves, Nixon had to pull the emergency brake. Two years after the fateful separation of gold all exchange rates were then released to the dollar.

From this point, the world's leading currency, the dollar was only a paper currency, which could be increased arbitrarily without any equivalent in gold. The consequences for the entire monetary system were strong, as there was no more fixed size to which the value of a currency was pegged. Central bankers suddenly had free hands for their monetary policy, as there was no need to secure the currency with gold. The default of fixed rules can be observed up to the present monetary policy. For the ECB, it would not have been so easy in times of the gold standard to print 22 million euros and use it to buy Italian and Spanish government bonds, as the European monetary authorities did in 2011. Following the old rules, it would have been impossible for the American and the British central banks to inflate the money supply to this gigantic amount to finance the multi-billion dollar buyout programs in recent years. Many experts even believe that Nixon´s decision was the basis for the financial crisis of 2008, which still persists in the nucleus. The elimination of the rules has significantly destabilized the financial system, the States since then have largely unhindered piled up debt. The dept ratio, (the measured liability of a country is measured at the economic output of a country, The debt ratio, here the amount of the liability is measured at the economic output of a country, climbed over the next four decades as of Germany from 18 to over 80 percent in France to over 95 percent in the US, they doubled from 50 to now 105 percent and in Japan, the debt ratio rose twelve times even from around 20 to 240 per cent in 2014. Every crisis has been more or less eliminated by cranking the money printing press.

Because of the loosening from the gold, the amounts of money has far more risen than the value of the goods and services produced. Hugh imbalances and asset bubbles were created in the world that led to the disaster in 2008. Since the abolition of the gold standards the mutual monetary system followed some chaotic rules, because all central banks worldwide intervene to control the rate of the domestic currency. Each of us, whether investors or consumers to feel the consequences, since the value of currencies was systematically undermined by the repeal of the rule binding. From 1971 – 2011 the dollar lost 97 percent against the gold, the Deutsche Mark, resp. the Euro “only” lost 94 percent. 

This has already led to a rethink. After years of selling their gold reserves, the first monetary banks started stocking up again. In times of such enormous national debt there appears to be no way to pass the gold. We should all of us pause.