The Dollar

Henry C.K. Liu hliu at
Mon Feb 8 02:47:23 PST 1999

There were several reasons why Nixon went off the gold standard, the federal deficit was only one. When the Fed was first organized, the law provided that the gold reserve must be at least enough to cover 40% of the currency in circulation and 35% of deposit accounts. In 1931, FDR odered all banks to turn over their gold to Federal Reserve Banks which turned it over to the Treasury, accepting gold certificates in return. Thus banks could lend paper money according to Fed reserve requirements, bypassing the required gold ratio. In 1934, FDR, by permission of Congress, devalued the dollar, reducing the gold content by 40%. The real strain was the size of the global economy which had grown such that if all the dollars were converted into gold at $35/onze, there were just not enough gold to hold the price. You remember, US citizen were forbidden by law to own gold prior to 1971, talking about freedom! As soon as the the dollar went off the gold standard, the price of gold went up 10 times eventually peaking around $550/onze. The dollar went off its grossly overvalued relation to gold and the euro dollars became devalued. All the gold smugglers around the world went out of business. The most important factor was again the Cold War. With Detent, the Soviet being a major gold producer, Nixon was also throwing them a bone to enter into the world trade system. Of course, if you talk to a different person, you are likely to get a different answer on the gold standard.


Daniel wrote:

> Henry wrote:
> "Seriously, no doubt the euro is going to be important, but unless the
> Europeans become more internationalist than they have been, the euro mya
> just go the route of the yen. It will tie its value to the dollar instead
> of setting a separate currency standard. At the end of the day, all wealth
> will still be counted in dollars. This is the reason why the US is arguing
> against the need for a new international financial architecture."
> Henry, I've been thinking about your point, and I realize that it highlights
> an aspect of this matter that I hadn't considered. But, still I wonder.
> Nixon was forced to decouple gold and the dollar because America had printed
> too many dollars for the war in Vietnam. (I mean, BASICALLY, that's what
> happened, n'est-ce pas?) Were there other currencies then that could rival
> the dollar? Yet, it happened. Why couldn't it happen again? If anything,
> there is a better alternative now than in 1971, isn't there? In fact,
> haven't there been some other pretty steep declines in the dollar, nearing
> panic, since then?
> Quincy

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