By: Joshua Gayman
In 1970 the US Government was running a spending deficit and a trade deficit(just like today) and so they were depleting their gold reserves because at the time the dollar was attached to gold to give it a hard asset-backed value.
This deficit spending caused inflation, which meant that other countries’ currencies would be devalued because all of the currencies of the developed nations in the world have been attached to the dollar since Bretton Woods in 1944(right after World War 2)
In 1971, Germany did not like that their currency was being devalued to keep the US dollar propped up, and so they unilaterally left the Bretton Woods system. This move by Germany strengthened their economy and simultaneously, the dollar dropped 7.5% against the Deutsche Mark.
Other countries started demanding payment from the United States in Gold due to the execessive printing of dollars and the negative trade imbalance of America.
On August 9th, 1971, France unilaterally withdrew from the Bretton Woods system, leaving their tie to the US dollar. As the dollar plunged again and to prevent a total collapse, President Nixon cut the link with the US Dollar from the gold standard less than one week later on August 15th, 1971-immediately and without the approval from Congress. Since that day, the dollar has been a fiat currency, a debt, and the United States has been the only country in the world to literally have the ability to print as much of it as they want.
Fast forward 40 years…
The dollar has lost 97.5% of it’s purchasing power. We have gone through the biggest booms in the history of the world. We have seen the biggest bust in the history of the world.
Unemployment is at records highs. The trade deficit and budget deficit are both at record highs. Foreclosure is at record highs. The money supply is rapidly setting new records. Again, like 1971, other countries are wanting out of their tie from their currency to the US dollar, and for the same reasons they did 40 years ago..That is, execessive printing and a trade deficit. This time, there is also a record budget deficit, and the US credit rating has been downgraded.
What major actions are left to be taken? Interest rates are already near zero, they are pumping as many dollars into circulation as possible, and they cannot cut spending enough to balance the budget, no matter what they cut.
There is no way gold can drop in value until the dollar dies and a new currency is set. Look at the pictures below to see why: