Sprott Gold Talk Radio looks back at the end of Bretton Woods
August 15the, 1971, Richard Nixon ended the Bretton Woods agreements by suspending the convertibility of the US dollar into gold. As the world passes the 50e anniversary of this historic event, Sprott Gold Talk Radio host Ed Coyne discussed its current implications for financial markets today with Jim Grant of Grant’s Interest Rate Observer.
In July 1944, representatives from 44 countries gathered in Bretton Woods, New Hampshire to establish an effective foreign exchange system with the aim of promoting international economic growth with the prospect of a prosperous post-war world. This agreement created the IMF and the World Bank. The architect of the agreement was none other than the famous economist John Maynard Keynes. Fifty years later, Richard Nixon would decouple the US dollar from gold.
Speaking of the immediate fallout from Nixon’s decision, Grant said that “the effect over the next 10 years has been great inflation which ripped off and ultimately ended in double digits and the rise to the presidency. from Paul A. Volcker’s Fed, to a brutal high interest rate regime and a deep recession. And then decades and decades of paper money, which we live with today.
America was losing gold to other countries, including France. The United States was issuing more dollars than it could earn, and it lacked the gold supply to redeem those dollars. In the years leading up to Nixon’s decision, Grant points out that America made numerous attempts to seek alternative solutions. “We helped each other set up something called the London Gold Pool, which tried to manipulate the price of gold downward in free market trading. We set up an operation called Operation Twist, which hiked interest rates to attract dollar deposits overseas by raising short rates. We imposed quotas and the president lectured us on the patriotic duty not to travel abroad. All of these things, all of these makeshift mobile devices failed, because of course they would delay what was actually the necessary climax of a constellation of economic facts.
Many believed Nixon had no choice but to take this step, although others believe it was a political coup to be re-elected. “You know, a proper gold standard is to subordinate national considerations to the exchange rate, to the integrity of the currency as defined by its inviolable right of convertibility… Gold, as my friend Lewis Lehrman says, is the least imperfect currency. average, but it is now out of the spotlight, having been sidelined by cryptocurrencies.
Host Ed Coyne added that “Cryptocurrencies, in general, continue to make the headlines with modern monetary theory… We really don’t know what all these different policies are going to do to our global economy, either. from an inflation point of view, a k-shaped recovery of crowding out, as you talk about in your last letter, of the middle class. I think I read there that the middle class has gone from 61% to 51%, and yes, the middle class is our economy. These are issues that are byproducts of what we did 50 years ago or what we are doing today.
The two also discuss how the inflation of the 1970s was largely due to the decoupling of the dollar from gold.
According to Grant: “On the sweep of a reasonable investment horizon, [gold] protects against the depredations of the stewards of our currencies. This is his goal. “
The solid discussion also revolved around the value of gold today and its place in the portfolio of any reasonable investor. Grant estimated that at “$ 1,800 an ounce; I would say that is relatively cheap compared to the monetary risk our central bankers present to us with interest rates removed and with the endless spinning of money through what we call quantitative easing.
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