13 - The Story of The Great American Inflation

Historically, the most stable periods of economic activity have existed under some form of “Gold Standard” in which money was backed by a store of value such as gold. We already know that gold and silver have underpinned the world's monetary system in one way or another for thousands of years.

Adoption of a Gold Standard in the U.S. and U.K.

Britain first moved to a gold standard in 1717 when the value of the pound was translated into gold at 3 pounds, 17 shillings, 10.5 pence per ounce of gold. This standard persisted for more than 200 years, interrupted only by wars and one or two other major crises. The U.S. first moved to a gold standard in the 1870s.

More recently, towards the end of the Second World War, the Bretton Woods Agreement was signed in which 44 major industrial nations, including the US and the UK, agreed to fix their currencies at a certain price against a certain quantity of gold.

However, in America in the 1960's and 70’s, significant overseas investment by U.S. corporations and the expanding expenditure on the Vietnam War resulted in millions of dollars leaving the United States. Its trading partners found themselves holding increasing amounts of paper U.S. dollars and as they exchanged their dollar holdings for gold with the U.S. Federal Reserve, a torrent of gold began to leave the U.S.

The U.S. Ends The Bretton Woods Gold Standard

Unhappy with the rate of outflows, in 1971 the U.S. suspended the convertibility of dollars into gold and by 1973 the major industrial countries had agreed to end the gold-based Bretton Woods agreement and to let their currencies float freely against one another.

From this point the major currencies were no longer backed by gold, or any other store of value. There was no longer a correction mechanism in place to prevent economic excess, no control in place to prevent inflation and a far greater likelihood that private citizens would see their savings obliterated.

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