Fifty years ago, the U.S. was in a crisis. The Vietnam war was raging on, and the U.S. was struggling to pay for the economic and human costs of the war. Meanwhile, the country was experiencing rampant inflation, as well as a looming run on what was left of the nation’s gold reserves.
On August 15, 1971, President Richard Nixon made the final step that would erase the link between the dollar and the gold. This move brought an end to the Bretton Woods system, which was supposed to bring stability and prosperity to the globe.
Former U.S. Representative Ron Paul, a lifelong defender of the gold standard, stated that Nixon’s August 1971 announcement was actually what prompted him to go into politics.
“I was looking for ways to talk about the issue of monetary policy,” Paul stated on his Liberty Report.
“I don’t think it was planned. It was late Sunday night, and Nixon had about 20 minutes to explain why he had to close down the whole system (which was not working very well) and close the gold window. It was a big event,” Paul recounted his experience.
At the time, Ron Paul had read Friedrich Hayek’s “Road to Serfdom” — which prompted him to read the works of Ludwig von Mises and meet Murray Rothbard. These were economists of the Austrian School, longtime defenders of the gold standard.
“It was on August 15, 1971, when the gold window was closed that it dawned on me that all that I was reading by the Austrian economist really was true,” Paul said.
Bretton Woods System – How It Started
It was on July 22, 1944, at the height of World War II, that leaders of 44 allied nations met at the Mount Washington Hotel in Bretton Woods, New Hampshire.
As the devastation caused by the war was becoming evident, world leaders, elites and reigning experts were intent on creating a system that would bring economic stability through international cooperation.
In the words of John Maynard Keynes, an influential economist and the primary architect of the system, these efforts could create a world in which “the brotherhood of man will have become more than a phrase.”
Curiously, these same sentiments were also behind the creation of the organizations that would eventually become the European Union.
U.S. Dollar as The World’s Reserve Currency
But what could they do? Allied nations were at the brink of bankruptcy. Most had crippling debts, debased currencies and depleted gold reserves.
All except the U.S., which had bankrolled the war despite its own colossal debt and still held substantial gold reserves.
The decision was as follows; the U.S. would peg its currency to gold, effectively going “back to the gold standard.” Other countries would peg their currencies to the gold-backed dollar.
The system also led to the creation of the International Monetary Fund (IMF) that served as a sort of a central bank for the system, lending reserve currency to countries with balance of payments deficits.
Attendees also agreed to create the International Bank for Reconstruction and Development, to help in reconstruction and aid development of underdeveloped countries. The institution is now known as the World Bank. The IMF and the World Bank are still in operation today.
Doomed From The Start?
The new system was not without its critics. The primary opposition came from the Austrian School.
Austrians economists argued that the system was doomed from the start. They did not see it as a real gold standard.
Perhaps the most influential critic at the time was Henry Hazlitt journalist and an author that wrote the popular book Economics in One Lesson.
Prompted by Mises, Hazlitt used his editorial position at the New York Times to warn against the plan.
Hazlitt predicted that the system would lead to world inflation. Yet, despite the fact that no one could refute his arguments, he was booted from New York Times.
Of course, his predictions came true. Starting in 1965, the Fed shifted to an inflationary monetary policy that continued to the early 1980s. The policy was known as the “Great Inflation” and led to the collapse of the system.
Still, the Great Inflation pales in comparison to the present monetary stimulus.
Governments Can’t Print Gold
Why did the Bretton Woods system ultimately fail?
One of the primary advantages of the gold standard is to ensure “monetary discipline.” Simply put, governments can’t print gold.
That means that governments can’t print money to pay for their expenses while eroding the purchasing power of money and the real living standards of their citizens.
Under a gold standard, a country with a gold-backed currency is very unlikely to try to issue more currency than there are reserves to back it. That sort of behavior exposes it to a run on its gold reserves.
The problem with Bretton Woods was that it was not the sort of gold standard that really instilled monetary discipline. The U.S. was the only country that offered convertibility in gold.
Austrians argued that monetary stability would be achieved only when multiple countries issued their own gold-backed currencies.
Without real monetary discipline, the U.S. just kept printing money. Nixon’s closure of the gold window was just the final consequence of decades of monetary policy that paid no attention to gold.
Lessons From Bretton Woods
What are the lessons of Bretton Woods today? There are several. The first is to be skeptical of international or “scientific” consensus.
Groups of influential people have been wrong before (as the collapse of Bretton Woods shows) and they will be wrong again.
The second is to be very skeptical of any sort of internationalist, “intergovernmental” and globalist schemes that are supposed to “save humanity” and “bring peace.”
More often than not, these schemes are really only about pushing the interests of those that are pushing it.
The third is that perhaps we should not just reject everything that worked in the past. The gold standard has worked for thousands of years, offering real monetary stability.
The pure fiat money standard has only existed for 50 years.
It also brought rampant inflation and several economic crises.
Could we give gold another try? Economists from the Austrian school and Ron Paul…would say yes.