50 years ago the U.S. closed its gold window, triggering the failure of our monetary system
Today is the 50th anniversary of fiat money in the United States. On Aug. 15, 1971, President Richard Nixon closed the gold window, meaning the U.S. government would no longer honor its promise to redeem dollars for gold presented by foreign central banks.
This ended the international monetary system known as Bretton Woods, which prevailed since the end of World War II. On the half-centennial of fiat dollars, we should acknowledge the failures of our current monetary regime.
This is not an apology for Bretton Woods, however. That system was just a new phase in the “managed” gold standard, which tried to combine gold redeemability of dollars with monetary management by the Federal Reserve. But central banks and gold-backed money are like oil and water: they don’t mix. Just because fiat money is bad doesn’t mean the Frankenstein monster of the managed gold standard is good. Only the purest form of the gold standard will do: complete freedom of money and banking.
The best gold-backed monetary systems, as existed in Scotland during the 18th century, Sweden during the 19th century, and Canada until the early 20th century, work like this. Gold, usually gold coins, is the most basic form of money. Banks take gold deposits and issue liabilities in the form of banknotes and deposits (checking and savings accounts), redeemable for gold on demand. The day-to-day medium of exchange is not physical gold, but claims on bank-held gold. The only rules that apply to banks are the general laws of property, contract and torts.
This is a totally free enterprise approach to money and banking. There’s no “market failure” that makes it appropriate for the government to take over the money supply and micromanage banking. The nations that embraced money and banking freedom enjoyed rapid economic growth. That’s because gold-backed money plus laissez-faire in banking created robust capital markets and facilitated long-term contracting.
In addition to improving long-run living standards, free enterprise in money and banking also delivers short-run economic stability. If the demand for money rises, banks issue additional liabilities. If the demand for money falls, banks contract their liabilities. As a result, the money supply responds to the needs of commerce. Banks naturally accommodate households’ and businesses’ desire for liquidity. This is an effective way to smooth out the business cycle. The best part is we don’t need to rely on politicians and bureaucrats to do it. Profit-seeking banks deliver the goods, like firms in any other industry.
Unfortunately, this system never existed in the U.S. Our banking arrangements have always been hobbled by misguided government regulations, both state and national. The Federal Reserve Act was passed in 1913 to try to smooth over the defects in our money and payments system. Instead, the Fed grew into a powerful and minimally accountable central bank. Its funny money policies have been the source of numerous economic calamities, from the Great Depression following the 1929 crash to the Great Recession following the 2008 crash. In terms of economic stability, the Fed has been a failure.
We should use the 50th anniversary of the end of fake gold to push for real gold. There’s no reason to think our broken monetary system can be fixed. We need less government in money and banking. Much less, in fact. Uncle Sam should get out of the way and allow the market to experiment with new money, banking and payments systems. Perhaps gold will reign supreme again. Perhaps Bitcoin will take its place. The only thing we know for sure is we need a market test.
The gold standard is the ultimate symbol of free enterprise and limited government. Maybe we can’t reclaim the promise of gold today. But that doesn’t mean we need to put up with government-mismanaged money. Let’s not tolerate half-measures like Bretton Woods. It’s time we demanded genuine financial freedom.
Alexander William Salter is an associate professor of economics at Texas Tech University, a research fellow with TTU’s Free Market Institute, and a senior fellow with the American Institute for Economic Research. He wrote this column for The Dallas Morning News.