As was the case with the creation of the original creation of the Federal Reserve, cutting the final connection to gold had little impact on the day-to-day life of an average American. The dollar did not change; the inflation that began to impact Americans in the mid-1960s continued.
It was foreign governments that were the most affected, as the collapse of the Bretton Woods system created a new era of uncertainty. The result was a new monetary system, with the American dollar — unbacked by gold — replacing gold as the global reserve currency.
Without hard money to back their currency, governments had to identify how to instill confidence in their currency. Some failed to do so, falling into the same mistake of relying on money printing to justify government spending. For example, the country of Zimbabwe ended up printing 100 trillion-dollar bills as the result of the hyperinflation that resulted from reckless government policies.
Many smaller countries tied their currency to the dollar — which meant their monetary policy was dictated by the Federal Reserve. Europe — except for the United Kingdom — created a continental central bank and currency — the euro, with the idea that no one country’s government would be in a position to abuse the printing press. Other global governing institutions — like the World Bank and the IMF — were also created to assist developing countries in this global economy.
Ultimately, the international monetary system transformed from one backed by hard currency and the discipline of the gold standard to one based on the whims of university-trained experts.
Of course, the actions of powerful bankers and government officials have always been the catalyst for the inflationary policies that have created the great economic crises of the past.
Governments are always the primary benefactor of inflationary monetary policy, and inflation is always an easier means of financing government spending than direct taxation. As long as money is in the hands of decision-makers aligned with the state, the incentive will be for central banks to expand the money supply at the expense of the rest of the population.
The result has been economic crises becoming larger and more global. The booms and busts of business cycles are created by the expansion of money and credit unbacked by real wealth. Without any tie to gold, governments, central banks, and large financial institutions have engaged in money and credit creation never seen. From stagflation in the 70s to the financial crisis of 2008 — central bank policy continues to sow the seeds for economic crises with increasing severity.
Another consequence of this has been normalizing consistent inflation. From 1792 to 1932, an ounce of gold consistently cost roughly $20. Between the period of FDR closing the gold window in the US, and Nixon doing so internationally, the price rose from $32 to $45. In 2021, an ounce of gold costs more than $1,800 dollars.
In our next video, we will look at the impact of this inflation.
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This series was inspired by Murray Rothbard’s classic introduction, What Has Government Done to Our Money?—available for free in PDF, ePub, HTML, and Audiobook at https://Mises.org/WHGD
To learn more about the operations of the Federal Reserve, check out Bob Murphy’s book, Understanding Money Mechanics, available for free in PDF, ePub, and HTML at https://Mises.org/BobMoney
For more animated content, check out Economics for Beginners at https://BeginEconomics.org.