World Wide Currency Debasement: The United States is Not the Sole Culprit

Simon Black of Sovereign Man is a perceptive commentator on contemporary events world wide. Indeed, Black’s writings have been one of the more important influences upon my decision to get the ball rolling on expatriating from the US. In stark terms, he points out that conditions will only deteriorate in the US until the debt issues are resolved. Additionally, the world is a big place with good things available to those who take the time and effort to seek them. However, as all too many people who point out the myriad serious issues facing the US, Black occasionally goes overboard. An example is in his blog post “Why dost thou whet thy knife so earnestly?“. He states:

The ducat began circulating in earnest in the late 1200s, so the coin’s status as a global reserve standard lasted nearly three-quarters of a millennium… a remarkable track record! Before the ducat, the Byzantine solidus gold coin held that status for the previous 800-years.

The reason for such unparalleled longevity is simple — throughout the centuries, these coins maintained their gold weight, and hence the purchasing power for those who held them. When governments began playing games and debasing the coins, they were quickly dropped as an international standard.

It’s the same story with the US dollar today. Foreigners have been paying close attention as the Federal Reserve has printed trillions of new dollars and violated its most sacred charter to preserve the value of the currency.

It’s bad enough that the dollar is merely a worthless piece of paper. The rest of the world begrudgingly submitted to this standard, trusting that the US would not abuse its authority to debase the currency.

As it turned out, this trust was severely misplaced, and the trillions of new dollars have helped create highly inflationary conditions in just about every developing country on the planet, from Indonesia to Sri Lanka to Botswana.

Black is absolutely correct that the Fed has actively debased the US dollar (in fact this has been happening almost since the inception of the Fed in 1913 as the US dollar has lost 96% of its value since then). However, to claim that the rest of the world ever thought that the US would maintain the value of the dollar when it was severed from gold in 1971 is absolutely not true. To see this, let us harken back to 1971 and examine why Nixon abrogated his obligations under the Bretton Woods treaty to maintain the link of the dollar to gold. By the mid 1960’s the US was on the road to bankruptcy. The unconscionable amounts of spending for the cold war, war in Vietnam, race to the moon, and Johnson’s expansion of welfare required a level of government spending that was politically impossible to fund via taxes. Thus, the government decided to embark upon funding via inflation. Dollars were being printed that were not backed by gold. The French smelled a rat and began to make loud noises about turning in their dollars to the Fed in exchange for gold. After various failed stopgap measures, Nixon decided to break the Bretton Woods treaty and defraud everyone in the world who was holding US dollars. The upshot in the US was a decade of economic chaos.

Now, at the time of these events in 1971, there was nothing to stop any government from instituting a gold standard. They knowingly instituted a US dollar standard despite the fact that the US had just demonstrated that it could not be trusted to maintain the value of its currency. To blame any subsequent inflation problems on the US is absurd. Every government in the world inflates to fund its activities. At any time, they can choose to cease inflating their currencies either by the discipline of a non-inflationary monetary rule or by a link to gold or instituting a true gold coin standard. Also, if they still want to inflate but at a slower rate than the Fed, they can link their currency to the Yen, Swiss Franc, etc. In the end, all governments are responsible for their inflation problems.

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