This week 45 years ago, August 15th 1971 to be exact, President Nixon suddenly declared the end of the Gold Standard. He ushered in the modern monetary system based on fiat paper and digital currency that works so poorly for us today and led to the global financial crisis.
The dramatic announcement by ‘Tricky Dicky’ is a must watch and you can see it here:
“Your dollar will be worth just as much tomorrow as it is today… ”
This was one of the most important events in modern financial, economic and monetary history and is a seminal moment in the creation of the global debt crisis which has confronted the U.S., Europe and the world in recent years and continues to this day.
Nixon ushered in an era of floating fiat currencies not backed by gold or silver but rather deriving value through government “fiat,” diktat or order of the government.
While Nixon justified the “technical” and “temporary” move as necessary to combat malign “international money speculators” who were “waging an all out war on the American dollar.” The real reason for the move was that the U.S. , then as today, was living way beyond its means with the Vietnam war and rapidly escalating military spending leading to large budget deficits and inflation.
Imperial overstretch had begun…
Governments internationally including the French and their President Charles de Gaulle were concerned about the debasement of the dollar and began to exchange their dollar reserves for gold bullion bars.
Nixon tried to reassure the American public about the “bugaboo of devaluation” and the value of their currency by declaring incorrectly and comically to us today:
“Your dollar will be worth just as much tomorrow as it is today… “
Subsequent to Nixon’s decision 45 years ago, the U.S. dollar fell very sharply. Gold surged in the coming 9 years and rose from $35/oz to $850/oz by January 1980. Since 1971, gold has fallen from 1/35th of an ounce of gold to 1/1350th of an ounce of gold today.
This is not the fault of “speculators”, rather it is the fault of irresponsible governments and central bankers debasing the U.S. dollar since 1913 and indeed since 1971. With the notable exception of Federal Reserve Chairman Paul Volcker.
Today, U.S. dollars and all paper and digital money is declared by governments to be legal tender, despite the fact that neither paper nor digital currency has any intrinsic value and is not backed by gold reserves.
Historically, currencies were based on precious metals such as gold or silver, but fiat money is based on faith and on the performance of politicians, bankers and central bankers.
Because today’s fiat money is not linked to physical reserves of gold and silver, it is becoming worth less with each passing month and risks becoming worthless should hyperinflation take hold as has been seen in many nations in recent years including Zimbabwe and as being seen in Venezuela today. Indeed, Nigeria appears to be in the early stages of an inflationary spiral.
If people lose faith in a nation’s paper currency, they exchange it rapidly for real things and hard assets. Their ‘money’ no longer holds value. People who own real assets are protected. Those who are dependent solely on income and wages see their income and their standard of living fall. We appear to be in the end phase of this cycle:
|Source: VisualizingEconomics.com via ZeroHedge.com|
Throughout history most fiat currencies have not survived more than a few decades and have succumbed to hyperinflation.
The fiat currency or paper and digital based international monetary system has survived 45 years but is in terminal decline with many astute commentators now questioning whether it will survive the coming global financial crisis.
Gold’s role as a store of value and important monetary asset is being increasingly appreciated. Although some less informed commentators still view gold as a “barbaric relic,” the biggest market participants are again using gold as an alternative monetary asset today.
These include the largest central banks in the world, the largest banks in the world, the largest insurance companies in the world, the largest hedge funds in the world, the largest pension funds in the world and indeed the wealthiest investors in the world.
Currency debasement has without fail ended in disaster throughout history and in recent years. As faith is lost in the debased currency, inflation surges and the economy collapses.
We have been warning of the real risk of an international monetary crisis and a currency reset which sees all fiat currencies devalued against gold. While hyperinflation remains a worst case scenario, stagflation and a virulent bout of inflation looks almost certain in the coming months in debt laden economies globally.
Gold and silver will protect against currency devaluations as is being seen in the UK since Brexit.