Fiat money turns 40, the tragedy goes on
Forty years ago, on Aug.15, the US dollar became backed by a promise from the government instead of gold. It was a mistake that's not too late to remedy.
A worker counts dollar bills being exchanged inside a money changer in Manila, Philippines early this month. Monday, Aug. 15 is the 40-year anniversary of the US dollar no longer being backed by gold. Is it something to celebrate?
Cheryl Ravelo / Reuters / File
Forty years ago today, on the morning of Sunday, August 15, 1971, the US president, Richard Nixon, declared the inconvertibility of the dollar into gold.[1] The 20,000 tons of the yellow metal deposited in Fort Knox in 1944 had decreased substantially due to the high military costs of the Vietnam War. The United States — the leading global economic power — could not honor its financial commitments.
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This is the institutional blog of the Ludwig von Mises Institute and many of its affiliated writers and scholars commenting on economic affairs of the day.
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As a result, the Bretton Woods system officially ended, and the dollar became a fully fiat currency, backed not by gold but by the promise of the government.
This meant the end of a historical and monetary rule that, from the dawn of civilization, had made money a general medium of exchange and also a store of value. It began a new era of historical abnormality — that of fiat currency and central-bank monopoly, where the ability to provide credit and financing becomes as boundless as the production of legally enforced paper printed by the issuing bank.
With the burial of the last vestiges of the gold — that "barbarous relic" of the past, in Keynes's words — the annoying limitation on the creation of money and credit was broken. Human needs, as well as political demands mobilized through democratic majorities (and minorities), are infinite.
Why stop spending? Why sacrifice immediate pleasures? The new fiat currency, devoid of intrinsic properties, releases governments from their commitment to convertibility, granting unlimited powers to the rulers of this statist system. With the burial of sound money, Keynes stands as the prophet of a new era of enjoyment and excitement under the new gospel of spending. Fiat money helps to remove the link between production and consumption, contributing to the delusion that the ineradicable scarcity of capital has been abolished.
The central banks can now print any amount of money. The dollar, which functions (so far) as the international currency, acquires real goods without offering anything in return. Of course, some holders of dollars are hard workers who, integrated within the structure of production, contribute to society with the provision of real goods and services. But there are also the politicians and bureaucrats — a completely different class of people.
This parasitic class weakens the productive class (and also manipulates production through public spending). At the moment, the European Central Bank is monetizing the debt of the peripheral European countries, diverting real resources from entrepreneurs in order to finance the wasteful activities of governments. It's totally outrageous, morally unjust, and economically ruinous. It's just one more road to serfdom.
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