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Chapter 8: Money - The Seeds of Destruction

U.S. dollar became the standard currency because the
U.S. guaranteed payment of gold in return for dollars
upon demand.

This fixed international exchange rate system did
not last because of the inflationary 1970s. It was not so
much inflation as it was the different inflation rates. If
America experiences a 10 percent inflation rate, the
value of the dollar declines by 10 percent. If England
has a 15 percent inflation rate, the English pound drops
in value by 15 percent. With values changing relative to
one another, how can countries trade, assuming fixed
exchange rates?

From 1963 to 1969, President Lyndon Johnson
increased spending on the Vietnam War and Medicaid
and Medicare as part of his “War on Poverty.”
America’s inflation problem began in 1969 when
President Richard Nixon convinced the Fed to increase
the money supply so that Congress could continue to
fund the Vietnam War and President Lyndon Johnson’s
Great Society welfare programs. Inflation reared its
ugly head because of this increase in the money supply.

President Nixon imposed wage-price controls in
1971, ran budget deficits, and announced he was a
Keynesian. The Nixon deficits caused foreigners to flee
the dollar for other currencies as they lost faith in the
U.S. economy. And on August 15, 1971, President
Nixon told a national television audience that the gold
standard was “kaput.” After this, the United States
refused to value the dollar at 1/35th of an ounce of gold
and closed the gold window. Before President Nixon
severed the ties between the dollar and gold, the Federal
Reserve could not create money as it does today.

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