What might have been

There was a chance in 1971 that the world’s monetary system could have been regularized and that the 2008 Crash would never have happened. Instead, America continued to print dollars and spend them like a man with no arms. It also meant that inflation was institutionalized as never before. Massve debts accumulated and completely outweighed the loan side of the world’s balance sheet. That’s where we are now.

After the Bretton Woods Agreement in 1942, the American dollar was placed in a privileged position so that gold — most of it already in America’s possession — could only be bought by dollars. By the late 1960s, however, some European countries had recovered sufficiently from the Second World War to have earned some dollars from trade and were queuing up at the New York Federal Bank’s gold window.

Within a few years, America’s gold reserves hurtled down from 21,000 tonnes to 11.000 tonnes and would have disappeared completely within another year or two had not President Nixon decided to take the American dollar off the gold standard completely. This meant that the American dollar could keep on inflating and America could continue to do what it was doing militarily over the world.

If, on the other hand, he had kept the dollar on the gold standard but allowed gold to find it own free market price without manipulating it, then the world’s balance sheet would be somewhere around zero, as it ought to be. Debts are paid promptly and bankruptcies, even of banks, are encouraged, in eras of no inflation. Certainly the 2008 Crash would never have happened.

2 thoughts on “What might have been

  1. I guess that those infatuated by the Gold standard will never give up finding rationalizations why the Gold standard is nirvana. Sorry about thi, but we have tried it and it does not work. It never did and never would.

    1. Ghassan — If I’m infatuated with the gold standard I suppose I can be brushed off. But what do you say to ex-cenral bankers, namely Alan Greenspan (US Fed) and Lord Mervyn King (Bank of England)? They both believe that the gold standard would bring about largely fault-free world trade. Alan Greenspan has never revoked his classic essay on the gold standard he wrote as a young men and specifically confirmed his belief in it — signing a copy for someone — only a few years ago.

      As for Mervyn King, if you read his recent book, The End of Alchemy, he is quite clear about the merits of a currency based upon a gold standard. If you read his comments a few times carefully enough you realize that he has never recommended it officially because that would negate the need for central banks! As someone who’s worked for over 30 years in one that would be a psychologically difficult thing to do. Nevertheless, he is honest enough about what he thinks about the gold standard.

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