The new international monetary order was conceived and then driven through by the United States at an international monetary conference at Bretton Woods, New Hampshire, in mid-1944, and ratified by the Congress in July, 1945. While the Bretton Woods system worked far better than the disaster of the 1930’s, it worked only as another inflationary recrudescence of the gold-exchange standard of the 1920s and—like the 1920s—the system lived only on borrowed time.

As dollars piled up abroad and gold continued to flow outward, the U.S. found it increasingly difficult to maintain the price of gold at $35 an ounce in the free gold markets at London and Zurich. Thirty-five dollars an ounce was the keystone of the system, and while American citizens have been barred since 1934 from owning gold anywhere in the world, other citizens have enjoyed the freedom to own gold bullion and coin. Hence, one way for individual Europeans to redeem their dollars in gold was to sell their dollars for gold at $35 an ounce in the free gold market.

On August 15, 1971, at the same time that President Nixon imposed a price-wage freeze in a vain attempt to check bounding inflation, Mr. Nixon also brought the post-war Bretton Woods system to a crashing end. As European Central Banks at last threatened to redeem much of their swollen stock of dollars for gold, President Nixon went totally off gold. For the first time in American history, the dollar was totally fiat, totally without backing in gold. Even the tenuous link with gold maintained since 1933 was now severed.

The Smithsonian Agreement, hailed by President Nixon as the “greatest monetary agreement in the history of the world,” was even more shaky and unsound than the gold exchange standard of the 1920s or than Bretton Woods. For once again, the countries of the world pledged to maintain fixed exchange rates, but this time with no gold or world money to give any currency backing. Furthermore, many European currencies were fixed at undervalued parities in relation to the dollar; the only U.S.

With the dollar breaking apart, the world shifted again, to a system of fluctuating fiat currencies. Within the West European block, exchange rates were tied to one another, and the U.S. again devalued the official dollar rate by a token amount, to $42 an ounce. As the dollar plunged in foreign exchange from day to day, and the West German mark, the Swiss franc, and the Japanese yen hurtled upward, the American authorities, backed by the Friedmanite economists, began to think that his was the monetary ideal.

Debasement was the State’s method of counterfeiting the very coins it had banned private firms from making in the name of vigorous protection of the monetary standard. Sometimes, the government committed simple fraud, secretly diluting gold with a base alloy, making shortweight coins. More characteristically, the mint melted and recoined all the coins of the realm, giving the subjects back the same number of “pounds” or “marks,” but of a lighter weight. The leftover ounces of gold or silver were pocketed by the King and used to pay his expenses.

A. Bimetallism

Government imposes price controls largely in order to divert public attention from governmental inflation to the alleged evils of the free market. As we have seen, “Gresham’s Law”—that an artificially overvalued money tends to drive an artificially undervalued money out of circulation—is an example of the general consequences of price control. Government places, in effect, a maximum price on one type of money in terms of the other.

The compulsory minting monopoly and legal tender legislation were the capstones in governments’ drive to gain control of their nations’ money.

The modern economy, with its widespread use of banks and money-substitutes, provides the golden opportunity for government to fasten its control over the money supply and permit inflation at its discretion. We have seen in section 12, page 20, that there are three great checks on the power of any bank to inflate under a “free banking” system: (1) the extent of the clientele of each bank; (2) the extent of the clientele of the whole banking system, i.e., the extent to which people use money-substitutes, and (3) the confidence of the clients in their banks.

Central Banking is now put in the same class with modern plumbing and good roads: any economy that doesn’t have it is called “backward,” “primitive,” hopelessly out of the swim. America’s adoption of the Federal Reserve System—our central bank—in 1913 was greeted as finally putting us in the ranks of the advanced “nations.”