Before Dollar Debasement: The Classical Gold Standard

Before the Great Depression, the United States operated under a gold standard.  This meant that most U.S. currency could be freely exchanged at banks or the U.S. Treasury for gold coins.  This was done at the rate of $20.67 for one troy ounce of gold.  In other words, a $20 gold certificate could be redeemed for a double-eagle gold coin which contained almost a full troy ounce of pure gold.

This conversion mechanism constrained growth in the money supply, meaning that there was effectively no inflation for as long as the system remained in place.  In addition, silver certificates that were directly redeemable for silver dollars also circulated in the economy, providing additional protection against U.S. dollar debasement.

The classical gold standard provided unprecedented financial stability and economic growth – not only in the United States, but also in other countries that had adopted it, including Great Britain, France, Germany and Japan.  It was only with the arrival of World War I that the international gold standard began to weaken.

• Early 1900s – The U.S. economy is dominated by a variety of high quality currency instruments. Gold certificates, silver certificates, United States Notes and Federal Reserve Notes (after 1914) all circulate side-by-side, along with gold and silver coins.
• 1913 – The Federal Reserve is founded as a “banker’s bank” with the stated purpose of preventing financial panics. The new institution’s policies will profoundly impact the trajectory of dollar debasement in the decades to come.
• 1914 to 1918 – World War I forces most belligerent nations to abandon the gold standard. The United States is a notable exception to this trend, which cements the country’s position as an international economic power.
• 1920s – A decade of economic expansion is driven by strong fundamentals and the newly formed Federal Reserve’s outrageous “coup de whiskey” monetary policy. This has grave consequences because it foments a massive Wall Street stock market bubble that surreptitiously undermines the economy.
• 1929 – The Great Wall Street Crash in October signals the start of the Great Depression.
• 1931 – The collapse of Credit-Anstalt, a major Austrian bank, ushers in the most virulent phase of the Great Depression.
• 1931 – Great Britain is forced off the gold standard in September of this year, greatly increasing monetary pressure on all countries that still maintain gold convertibility, including the United States.
• 1933 – Franklin Delano Roosevelt assumes the Presidency and immediately calls a banking holiday. He simultaneously suspends the gold convertibility of the U.S. dollar.  A short time later, on April 5, FDR effectively nationalizes the country’s gold, declaring that all privately-held gold coins and gold certificates must be exchanged for non-gold currency.
• 1934 – FDR increases the price of gold from $20.67 to $35 per troy ounce. This effectively devalues the U.S. dollar by 41%.  The classical gold standard in the United States is officially dead and the modern era of dollar debasement begins.
• 1934 – The U.S. Treasury commissions a final series of gold certificates. These are not intended for public circulation, but are instead used for bank reserves and inter-bank transfers.
• 1935 – FDR passes a law allowing the U.S. Treasury to issue small-denomination, government-backed bonds, otherwise known as savings bonds, directly to the public. Savings bonds allow U.S. citizens to invest in a safe Treasury instrument with a competitive interest rate.

Dollar Debasement Begins: The Bretton Woods System

In the wake of the widespread devastation wrought by the Great Depression and World War II, a new international monetary framework was desperately needed.  As a result, in July 1944, 44 representatives of the allied nations, including Great Britain, the United States, France and the Soviet Union, gathered at Bretton Woods, New Hampshire to hammer out a new monetary system.

It was finally decided that the U.S. dollar would be convertible into gold at the rate of $35 for each troy ounce.  But only foreign governments and central banks would be allowed to exercise this conversion feature, not individuals.  In addition, all other countries would tie the value of their currencies to the dollar.

Although silver certificates and silver coins freely circulated in America during this period, gold bullion was illegal for U.S. citizens to own.  Each $1 silver certificate was exchangeable into a silver dollar containing 0.77344 troy ounces of pure silver.  United States Notes and Federal Reserve Notes also circulated and could be exchanged for fiduciary silver coinage (90% silver dimes, quarters and half dollars) which contained 0.7234 troy ounces of silver per $1 face value.

• 1944 – The Bretton Woods system is formalized. This monetary structure is quickly adopted by most nations that are not part of the Soviet Communist Bloc.
• 1950s – A period of international prosperity exists, with the United States acting as both the world’s monetary hub and primary export destination. However, the United State’s huge silver and gold reserves are gradually drawn down to pay for this flood of foreign imports.
• Early 1960s – The rising price of silver in the international market makes it clear that the U.S. government will soon have difficulty redeeming silver certificates at their traditional rate.
• 1964 – The U.S. government suspends the Treasury’s obligation to redeem silver certificates for silver dollars, but still allows redemption for raw silver granules or bullion bars for a limited time.
• 1964 – U.S. citizens are allowed to legally own gold certificates again. While they regain their legal tender status, they are no longer redeemable for gold.
• 1966 – The U.S. Mint strikes its last 90% silver coins meant for circulation (which are dated 1964 due to a date freeze). The only circulating U.S. coins with any precious metal remaining are 40% silver Kennedy half dollars.  Most U.S. coinage is now copper-nickel slugs.
• 1968 – The U.S. Treasury discontinues redeeming silver certificates in their entirety, although the notes still remain legal tender.
• 1969 – The U.S. Treasury withdraws high denomination currency from circulation due to fears that it facilitates organized crime. But honest citizens who crave financial discretion and safety are most impacted.  This policy applies to the $500, $1,000, $5,000 and $10,000 bills.  These large denomination notes are not, however, demonetized.
• 1970 – The 40% silver Kennedy half dollar is discontinued and replaced with a copper-nickel base metal version. There are now no coins produced by the U.S. Mint for general circulation that contain any silver.
• 1971 – In August, President Richard Nixon stops redeeming U.S. dollars presented by foreign governments and central banks for gold. This ends the last formal link that the U.S. dollar has to precious metals, marking a new era in dollar debasement.  All currencies in the world are now fiat currencies with floating exchange rates.
• Early 1970s – By this time, nearly all 90% U.S. silver coinage (especially dimes and quarters) have been pulled from circulation due to Gresham’s Law.
• 1973 – An international oil crisis is precipitated when Arab nations refuse to exchange their oil for now depreciated U.S. dollars at the traditional rate.
• 1975 – After more than 40 years of being illegal, gold ownership for U.S. citizens is re-legalized.

Dollar Debasement Accelerates: The Bretton Woods II System

After the monetary chaos of the 1970s, which was characterized by persistently high inflation and frequent recessions, a monetary reform was necessary.  The U.S. Federal Reserve raised short-term interest rates to a dizzying 20% in 1980 in order to break the economy’s deleterious inflationary cycle.  Once confidence in the dollar had been reestablished, a reconstituted global monetary system emerged.

Unlike the original Bretton Woods System, the Bretton Woods II System was entirely informal.  While the U.S. dollar remained at the center of the global monetary system as the world’s reserve currency, it was no longer exchangeable for gold or silver at a fixed rate.  Instead, all currencies floated freely against each other.

The United States also remained the world’s primary destination for exported goods, gradually leading to a slow deindustrialization of the country.

• 1980 – A bubble in precious metals – gold, silver and platinum – finally bursts after the Federal Reserve raises short-term interest rates to unbelievably high levels.
• 1982 – The U.S. Government bans the issuance of new bearer bonds. This is a blow to financial anonymity because these corporate promissory notes are similar to cash; whoever holds them receives their interest and principal payments.  However, existing bearer bonds are allowed to mature naturally.  Because the maximum term of a bond is typically no more than 30 years, the last of these bearer bonds mature by 2012.
• 1980s – A period of relative economic prosperity develops as the Federal Reserve’s relatively cautious interest rate policies discourage widespread speculation.
• 1986 – The U.S. Mint begins striking American Gold and Silver Eagle bullion coins, giving small investors a good way to accumulate precious metals with confidence.
• Late 1990s – The advent of the original technology bubble ushers in an era of destabilizing, serial boom-bust financial markets. This development is encouraged by a profligate Federal Reserve that reliably “bails-out” bubble speculators.
• Mid 2000s – The Federal Reserve holds short-term interest rates too low for too long, giving rise to the Housing Bubble.
• Mid 2000s – Due to the rising price of precious metals, the last remnants of pre-1970 silver coinage finally disappear from circulation. Looking through rolls of coins from your local bank in hopes finding the odd silver Kennedy half dollar or silver war nickel is now a lost cause.
• 2008 – The Great Financial Crisis strikes when the Housing Bubble bursts. The Federal Reserve lowers interest rates to almost zero, causing significant dollar debasement.  The Fed, in effect, subjects the American people to intense financial repression in order to recapitalize the irresponsible banking system.
• Late 2000s – The U.S. Treasury systematically lowers the interest rates it pays on savings bonds, making them far less attractive investments to small savers than they used to be.
• 2009 – New York City’s centralized clearinghouse for stock settlements adds a $500 fee to the cost of issuing new paper stock certificates, effectively ending their creation. However, existing paper stocks certificates are allowed to remain outstanding.
• 2012 – The U.S. Government states that it will no longer issue physical savings bonds certificates. From now on all U.S. savings bonds are digital only, with only one minor exception.  This is the death knell of the U.S. savings bond program.
• 2013 – The Depository Trust & Clearing Corporation (DTCC) proposes the elimination of all physical stock certificates. This would make it impossible to hold stocks anywhere except for a brokerage account or DRIP plan.
• 2010s – The Federal Reserve again suppresses short-term interest rates, inflating a grotesque, hybrid Real Estate/Stock Market/Bond Market/Crypto-Currency Bubble. When it finally bursts, the economic fallout will be catastrophic.
• 2016 – Several stories run in the media in favor of discontinuing the $100 bill – ostensibly because of their alleged use in criminal transactions. This is in spite of the fact that a $100 bill in 2016 only has the same purchasing power as a $10 bill in 1950.

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