How Bad Is Currency Debasement of the Dollar?

And is there anything we can do about it?

US Dollar” by emilleilmansyah is marked with CC BY-SA 2.0.

Well, currency debasement is pretty bad, as a few key statistics will reveal, but first some background.

At the Bretton Woods Conference in 1944 the US agreed that it would redeem dollars for gold at $35 per ounce. If the US conducted a disciplined and honest monetary system, this would mean that the dollar was “as good as gold”; i.e., the US would not create more dollars unless it had gold to back them at the agreed upon rate. Foreign central banks could use the dollar as a proxy for gold in international settlements of trade, reducing the need for foreign central banks, many of whom had shipped their gold to the US during the war, to hold much actual gold bullion. Foreign central banks could simply hold dollars. If a foreign central bank built up more dollar reserves than it needed for trade settlement, it could present dollars to the US Treasury/Federal Reserve Bank and receive actual gold bullion at the agreed upon rate of $35 per ounce.

All appeared to go swimmingly until the French smelled a rat in the late 1960’s. Both French President Charles de Gaulle and his finance minister Jacques Rueff were astute economists of the Austrian school. De Gaulle instructed the Bank of France to redeem eighty percent of its dollars for gold. The bank run was on! US gold reserves dwindled until the US had to make a choice and, yes, it did have a choice. The US could have devalued the dollar to require more dollars per ounce of gold and then adopted measures to reassure our allies and trading partners that it would be good stewards of the dollar thereafter. Instead Nixon took the US completely off the gold standard in the fall of 1971.

The following table is instructive, both for what caused the run on the US gold reserves and the parameters of what the US could do now to stabilize the dollar and prevent its complete destruction:

DateOfficial tonnes
of gold
Base ($billions) 
Stock/M1 ($billions)
194517,848 $40$110
1971 9,070 $84$225
20228,172 $6,104$20,568

Between the end of World War II in 1945 and Nixon taking the US off the gold standard in 1971 the amount of gold held by the Treasury/Fed halved and both the monetary base and M1 doubled. This was enough to end the charade that the US had been a good steward of the international monetary system based upon the “good-as-gold” dollar at $35 per ounce.

But in hindsight the US’s monetary stewardship in the quarter century from the end of the war until the end of the gold standard appears as one of integrity, honesty, etc. compared to what has happened since. The amount of gold held by the Treasury/Fed has shrunk somewhat, but we really don’t know if it really is there, since there has not been a physical audit of the nation’s gold for many decades. What’s truly shocking is the expansion of both base money and the money stock in the fifty years of pure fiat money. The monetary base has increased by seventy-three (73) times its 1971 level. The money stock has increased by ninety-one (91) times. There is no reason to believe that the money expansion machine will stop or even slow down. In fact it may speed up. Just consider what the current administration, supported by a majority in Congress, wish to spend–infrastructure bill, build-back-better bill, an increase for the military (of course!), more stimulus checks to help people pay for their increased energy bills. There is no budgetary discipline. Nevertheless, if government will not instill discipline, markets will. The dollar will collapse into worthlessness.

Is There Anything We Can Do about It?

But there is an alternative. Despite the huge ratio of dollars to gold, the US could still tie the dollar to its gold supply. Per Ludwig von Mises:

Every nation, whether rich or poor, powerful or feeble, can at any hour once again adopt the gold standard.  Omnipotent Government

It would have to set up an independent agency to oversee the absolute right that anyone could redeem dollars for gold at the new higher exchange rate. The Fed would have to be phased out, especially its monetary meddling operation by which it sets interest rates and monetizes government debt. The federal government would have to balance its budget, but it can be done. In fact it has been done. Germany ended its post World War I hyperinflation by issuing a new currency and slashing its federal budget. If the Germans can do it after a humiliating defeat in war and after suffering the horrible terms of the Versailles Treaty, the US can do it in the absence of such conditions. Per Ludwig von Mises:

The return to gold does not depend on the fulfillment of some material condition.  It is an ideological problem.  It presupposes one thing: the abandonment of the illusion that increasing the quantity of money creates prosperity.  Economic Freedom and Interventionism

The solution is simple even if politically difficult. In 1953 Ludwig von Mises added Part Four, titled “Monetary Reconstruction”, to his 1912 masterpiece The Theory of Money and Credit. Part Four contained three chapters, the final of which is titled “The Return to Sound Money”. In this short chapter Mises laid out a simple plan by which any nation, although he specifically mentioned the United States, can return to sound money; i.e., a gold backed currency. The fact that the US has greatly inflated its money stock since 1953 does not change the mechanism by which a gold-backed dollar can be reinstated or the benefit of doing so. Time is running out, though. It may well be impossible to do after the world starts abandoning the dollar.

© Patrick Barron 2022 Website