Early in 1944, Britain and the U.S. agreed it was necessary to establish new currency rules for the regulation of international trade — prior to the end of World War II.
A workable plan results
The conference was scheduled for July 1 through 22, with 44 nations to attend, according to The Encyclopedia Britannia. A singular important issue was decided: The U.S. dollar was designated as the world’s “reserve” currency. It was to maintain convertibility at the established rate of $35 per troy ounce of .9999 gold — the Gold Standard. (There are 12 troy ounces to a pound.)
While salmon fishing near the Klondike River in Canada's Yukon Territory on this day in 1896, George Carmack reportedly spots nuggets of gold in a creek bed. His lucky discovery sparks the last great gold rush in the American West.
Hoping to cash in on reported gold strikes in Alaska, Carmack had traveled there from California in 1881. After running into a dead end, he headed north into the isolated Yukon Territory, just across the Canadian border. In 1896, another prospector, Robert Henderson, told Carmack of finding gold in a tributary of the Klondike River. Carmack headed to the region with two Native American companions, known as Skookum Jim and Tagish Charlie. On August 16, while camping near Rabbit Creek, Carmack reportedly spotted a nugget of gold jutting out from the creek bank. His two companions later agreed that Skookum Jim--Carmack's brother-in-law--actually made the discovery.
Regardless of who spotted the gold first, the three men soon found that the rock near the creek bed was thick with gold deposits. They staked their claim the following day. News of the gold strike spread fast across Canada and the United States, and over the next two years, as many as 50,000 would-be miners arrived in the region. Rabbit Creek was renamed Bonanza, and even more gold was discovered in another Klondike tributary, dubbed Eldorado.
Tony Daltorio writes: This history of the gold standard explains why there's a growing group of advocates calling for its return...
President Herbert Hoover made a statement in 1933 that rang true for centuries and still rings true today for many: "We have gold because we cannot trust governments."
Hoover was talking about how governments have never been able to resist the temptation to inflate the amount of paper money issued until that paper money becomes nearly worthless. Gold, meanwhile, has been a reliable preserver of wealth for literally centuries.
Some nations have tried to meld the two together - gold and paper money - through the use of what is called the gold standard.
A gold standard is a monetary system where paper money is directly convertible into a fixed amount of gold. In other words, the value of paper money is backed by gold.
England was the first country to adopt such a monetary system in 1822 and its use soon spread around the world, including in the United States.
As the U.S. banking crisis ebbed in early 1933, central-bank gold reserves were rising, and gold-based currency notes were steadily flowing back into accounts. The country was experiencing a positive balance of trade.
"Not one of the conditions usually attendant to a suspension of gold payments was present at the time," the Economist magazine would write in May.
Yet on April 20, President Franklin D. Roosevelt signed an executive order banning the export of gold to settle international accounts. This followed an April 5 executive order that removed gold from commercial circulation and an April 17 decision to sever the dollar’s value from gold’s price, "letting it float."
Given that the U.S. possessed more than one-third of the world’s supply of the metal, what was going on?
After years of contraction and deflation, rural Democrats called for abandoning the gold standard, devaluing the dollar and thus making exports cheaper and imports more expensive, all of which they hoped would increase the prices of farm products.
Their critics argued that such maneuvers could set off uncontrollable inflation. Former German Foreign Minister Richard von Kuehlmann compared it to the runaway price increases that crashed post-armistice Germany's financial system.
If the U.S. left the gold standard, he said, "Germany would have to go off the gold standard immediately, and France would eventually have to follow. A race for the worst currency would result because of the advantages of depreciation."
A popular story promoted by Monetarist School thinkers is the one about Milton Friedman discrediting the Phillips Curve. For those not familiar with the latter, it’s the incorrect theory embraced by Keynesians that says economic growth is the cause of inflation.
Keynesians presume that speedy growth leads to labor and capacity shortages that result in higher prices. Of course if we ignore that labor and capacity are dynamic as opposed to static, and similarly ignore technological enhancements that allow companies to produce increasing amounts with less labor and capacity, we can’t ignore that the U.S. is not an island. Assuming shortages, American producers regularly access the world’s labor and the world’s factories such that growth could never impact the price level as is assumed.
About the U.S. not being an impregnable economic island, monetarists should take note as their theory similarly presumes Fortress U.S.A. They believe dollar credit is controlled by the Fed through the banks it regulates, as opposed to credit for dollars being a rather broad concept such that any Fed ‘tightness’ has historically been made up for by inflows of dollars (think the eurodollar market among countless others) from around the world.
Monetarists correctly argued that inflation is always a monetary phenomenon, but the newly revived theory that was long ago dismissed even by Friedman is merely a variation of the much discredited Phillips Curve. To put it plainly, monetarism is a parallel version of Keynesian demand management.