In the 1860s the large financing needs of the Civil War prompted the US to suspend gold convertibility and
print money (known as “greenbacks”) to help monetize war debts.
After the US returned to its prior gold peg in the mid-1870s a number of other countries joined the gold
standard; most currencies remained fixed against gold up until World War I. Major exceptions were Japan
(which was on a silver-linked standard until the 1890s, which led its exchange rate to devalue against gold as
silver prices fell during this period), and Italy and Spain, which frequently suspended convertibility to support
large fiscal deficits.
Then came World War I when warring countries ran enormous deficits that were funded by central banks’
printing and lending of money. During the war years gold was international money as international credit was
lacking because trust was lacking. Then the war ended, and a new monetary order was created with gold and
the winning countries’ currencies, which were tied to it, at the center of that new monetary order.
Still, in 1919-22 the printing of money and devaluations of several European currencies were required as an
extension of the debt crises of those most indebted, especially those that lost World War I. As shown this led
to the total extinction of the German mark and German mark debt in the 1920-23 period and big devaluations
in other countries’ currencies including the winners of the war that also had debts that had to be devalued to
create a new start.
With the debt, domestic political, and international geopolitical restructurings done, the 1920s was a boom
period, which became a bubble that burst in 1929.
In 1930-45, 1) when the debt bubble burst that required central banks to print money and devalue it, and then
2) when the war debts had to increase to fund the war that required more printing of money and more
devaluations.
At the end of the war, in 1944-45, the new monetary system that linked the dollar to gold and other currencies
to the dollar was created, and the currencies and debts of Germany, Japan, Italy, and China (and a number of
other countries) were quickly and totally destroyed while those of most winners of the war were slowly but
still substantially depreciated. That monetary system stayed in place until the late 1960s.
In 1968-73 (most importantly in 1971), when excessive spending and debt creation especially by the US
required the breaking of the link with gold because claims on gold were being turned in for actual gold and
the claims were far greater than the amount of gold that was available to redeem the claims, that led to going
to a dollar-based fiat monetary system that allowed the big increase in dollar-denominated money and credit
that fueled the inflation of the 1970s and led to the debt crisis of the 1980s.
Since 2000 the value of money has fallen in relation to the value of gold due to lots of money and credit
creation and because of interest rates being low in relation to inflation rates. Because the monetary system has
been a free-floating monetary system there have not been the abrupt breaks that there have been in the past;
there has been a more gradual and continuous devaluation in which low or in some cases negative interest
rates did not provide compensation for the increasing amount of money and credit and the resulting (albeit
low) inflation.
Let’s look at these periods more closely.
As shown in the prior charts, the returns of holding currencies (i.e., short-term debt that collects interest) during
the period from 1850 to 1913 were generally profitable relative to the returns of holding gold. During that more
than 60-year debt/currency cycle period, most currencies were able to remain fixed against gold or silver and one
would have collected an attractive interest rate because it was mostly a prosperous period in which both lending
and borrowing worked well for those who did it. That prosperous period was what is known as the Second
Industrial Revolution, when the borrowers turned the money they borrowed into earnings that allowed the debts to
be paid back. While there were debt crises in that period (such as “the Panic of 1873,” “the Panic of 1893,” and
“the Panic of 1907” in the US) they were not big enough to necessitate devaluations, though they were turbulent.
For example, the prosperity of the Second Industrial Revolution led to a debt-financed speculative boom in stocks
that grew overextended, which led to a banking and brokerage crisis. In the US that led to the six-week-long Panic
of 1907 at the same time the large wealth gap and other social issues (e.g., women’s suffrage) caused political
tensions, capitalism was challenged, and taxes started to rise to fund the wealth redistribution process.