World War II and the End of the Gold Standard

This is the fourth post in a series entitled Currency, Money and the Economy.

In the last post, we discussed the consequences that World War I had on the economic situations in both the United States and Europe. Knowing the havoc it wreaked, when the Allied Nations got the upper hand in World War II, the leaders got together at Bretton Woods, New Hampshire to come up with a plan to avoid the same problem. Once again, the United States was in the best position since it had stayed out of the war at the beginning and no fighting had taken place on American soil except Pearl Harbor. Therefore, the solution they came up with was that the US dollar would be pegged to the value of gold, while the other European nations would be pegged to the US dollar. This effectively established the US dollar as the world reserve currency. Anything traded in the world, from sugar to oil, was primarily traded in US dollars (and still is today). However, when the deal was conceived, there was no reserve ratio set for the Federal Reserve for dollars in circulation versus the gold it had on hand. Essentially, this gave the United States license to print as much currency as it wanted.

Now, the United States was pretty good at restraining itself for the next twenty years. The baby boomer generation was born and life was good. That is, until a little Southeast Asian conflict known as the Vietnam War. Instead of asking its citizens to buy war bonds or pay for the war through higher taxes, the Johnson and Nixon administrations simply paid for the war through deficit spending, or printing the money they needed to pay for the war (historical playbook, step 3). President Charles de Gaulle of France worried about the price of his country’s currency relative to the US dollar, decided to take a preemptive strike and began cashing the US dollars his country had on hand for gold. The run on gold forced President Nixon in 1971 to remove the US dollar from the gold standard (historical playbook, step 4). In other words, you could no longer trade your dollar into the United States government and receive gold in return. This left the United States with a raging inflation problem throughout the 1970’s. Eventually raising interest rates exceeded the rate of inflation and the problem was brought back under control. However, once again, the value of people savings had been eaten up unless, once again, you owned gold or silver. Gold set a record at $850 an ounce while silver set a record at $52.50 an ounce.

In the next post, we will set the stage for what could be the final act of the US dollar.