which had largely recovered from the war, were increasingly effective competitors in producing
manufactured goods such as cars so US trade balances were worsening. At the same time, the US
government was spending increasing amounts on fighting the Vietnam War and domestic social programs
(called “guns and butter”). To finance all this spending, the US Federal Reserve allowed the creation of a lot
more claims on gold than could actually be converted into gold at the set $35 price. As the paper money was
turned in for the hard money (gold), the quantity of gold in the US central bank went down at the same time
as the claims on it continued to rise. As a result, the Bretton Woods monetary system broke down on August
15, 1971, when President Nixon, like President Franklin Roosevelt on March 5, 1933, broke the US’s pledge
to allow holders of paper dollars to turn them in for gold. As shown in the below charts, as the US was
spending more than it was earning and the paper money claims on gold were turned in for gold, US gold
reserves went down until the US government realized that they would run out and stopped allowing the
conversion at which time the dollar plunged in value relative to gold and the two leading alternative
currencies, which were the German deutschmark and the Japanese yen.
As I recounted in Chapter 2, I remember the devaluation of the dollar very well. I was clerking on the floor of
the New York Stock Exchange at the time. I was watching on TV as President Nixon told the world that the
dollar would no longer be tied to gold. I thought, “Oh my God, the monetary system as we know it is ending,” and
it was. The next day was Monday. When I got to work I expected there to be pandemonium, with stocks falling.
There was pandemonium all right, but stocks were rising. Because I had never seen a devaluation before, I didn’t
understand how they worked. Then I looked into history and found that on the evening of March 5, 1933, also a
Sunday, President Franklin Roosevelt had given essentially the same speech, doing essentially the same thing,
which yielded essentially the same result over the following months (a devaluation, a big stock market rally, and
big gains in the gold price). As I looked further, I saw that it had happened many times before in many countries
for the same reason—too much debt that needed money to ease the debt burden—with essentially the same
proclamations by top government officials. More recent cases that you might remember include the Fed
announcing QE on November 25, 2008, which followed Congress approving Treasury Secretary Hank Paulson’s
request for the federal government to provide $700 billion for asset purchases; Mario Draghi in July 2012 stating
that the ECB would “do whatever it takes,” which was followed by massive printing of money and buying of
government debt; and March 15, 2020, when President Trump and leaders of both houses of Congress agreed on
an over $2 trillion stimulus plan, and Fed Chair Powell announced big interest rate cuts to 0%, a $700 billion QE
plan, and a slew of other supports, with both announcements followed by other big increases in these numbers.
The Inflationary and Troubled 1970s
After the 1971 delinking of the dollar and other currencies from gold, the world moved to an unanchored
fiat (Type 3) monetary system and the dollar fell in value against gold, other currencies, stocks, and
eventually just about everything. The new monetary system was negotiated by the leading economic policy
makers of the United States, Germany, and Japan. If you want to read a great description of this process of
figuring out how to go from the old monetary system to the new fiat one, I recommend Changing Fortunes by Paul
Volcker and Toyoo Gyohten. Volcker was the leading American policy maker to determine how the new post-
Bretton Woods monetary system would work. He was the person who knew more about monetary systems and
was more at the center of the US dollar system from before the 1971 monetary breakdown (he was the
Undersecretary of International Monetary Affairs under Nixon when Nixon severed the link with gold)