The 9 Stages Of Global Monetary Breakdown

President Richard Nixon

Photo: Wikimedia

The Ludwig von Mises Institute has published a timely portrayal of what, they consider, the downfall of the global currency system.It all starts with the world straying from the gold standard, and ends in the currency war we’re experiencing today.

The explanation certainly has perspective, and is not without its biases or faults, but we’ve summarized the 9 steps to monetary breakdown exerted from Murray N. Rothbard’s What Has Government Done To Our Money.

You can check out the lengthy excerpt here, but we’ve broken down the 9 steps for you in the following slides.

Phase I: The Classical Gold Standard, 1815 -1914

This time period was defined by a gold standard in which currencies represented a certain amount of gold and were convertible into that gold.

This allowed gold to function as an international currency throughout the Western world, encouraging and simplifying trade.

They system may have allowed for booms and busts, inflation and recession, but the result was controlled.


Image: Queen Victoria, Queen of England, 1837-1901

Phase II: World War I and After

Governments, faced with the rising costs of World War I, had to increase their paper money supply. In doing this, they gave up the gold standard. The U.S., in comparison to European powers, retained its gold position.

The result was a chaotic environment where international trade broke down.


Image: Trenches of World War I

Phase III: The Gold-Exchange Standard 1926-1931

Instead of returning to a gold standard that reflected the realities of a changed relationship between paper money and gold, Britain attempted to return to its previous conversion rate.

While the U.S. remained on the regular gold standard, the British invented the gold-exchange, and allowed conversion of their pounds into dollars. All other currencies in the system were convertible into pounds.

The set-up couldn't last, due to the impact of British inflation and an eventual undermining of the system, which led to Britain and other European countries coming off the exchange.


Image: Calvin Coolidge, U.S. President, 1923-1929

Phase IV: Fluctuating Fiat Currencies, 1931-1945

The result of the abandonment of the gold-exchange standard, was the breakdown of international trade, except for barter agreements between states. The U.S. came off the gold standard to fight depression, but allowed the dollar to convert to gold for central banks.

This led to out and out economic warfare between states and, eventually, World War II.


Image: Franklin D. Roosevelt, U.S. President, 1933-1945

Phase V: Bretton Woods and the New Gold-Exchange Standard 1945-1968

In the aftermath of World War II, the U.S. government set-up and signed on the world to a whole new gold-exchange standard, in which the dollar was convertible to 1/35 of a gold ounce.

Other currencies set conversions to dollars taken from the pre-war period. There was a dollar shortage in this period, which the U.S. made up through foreign aid.

Imbalances, however, started to pile up and countries became tired of collecting more and more dollars to drive inflation domestically.

As a result of the dollar being overvalued, countries started to convert their dollars to gold. The U.S. saw its gold reserves decline as a result.


Image: Mount Washington Hotel, Bretton Woods

Phase VI: The unravelling of Bretton Woods, 1968-1971

In response to higher demand to convert dollars to gold, the U.S. government attempted to set up a two-tier exchange system. Under that system, central banks worldwide would convert gold to dollars at the old rate, while there would be a private market functioning at its own level.

The U.S. also pushed for Special Drawing Rights (SDRs) to be created at this time, to replace gold as a world wide paper currency. Gold's price continued to rise on the private market, and this system did not last long.


Image: Lyndon B. Johnson, U.S. President, 1963-1969

Phase VII: The End of Bretton Woods: Fluctuating Fiat Currencies, August - December 1971

With the world threatening to redeem their dollars to gold, President Nixon takes the dollar off the gold standard, sending the world into fiat currency chaos.


Image: Richard Nixon, U.S. President, 1969-1974

Phase VIII: The Smithsonian Agreement, December 1971 - February 1973

The Smithsonian agreement set up world currencies at fixed exchange rates. This did not last long, however, because the amount of Eurodollars in the market was too high with inflation continuing in the U.S. for 'hard-money' countries to maintain their dollar purchases.


Image: Smithsonian Institution, Washington, D.C.

Phase IX: Fluctuating Fiat Currencies, March 1973 - ?

At first, the fluctuating currency marketplace functioned fine. U.S. companies were happy to see the dollar devalued, as it meant their exports were cheaper. The Western Europeans had their own currency bloc developing, with fixed exchange rates.

But eventually, this situation leads to currency conflicts, competitive devaluations, and other means for countries unhappy over a weak dollar to fight back.

This has lead to a world plagued by inflation, and only propelled the push for an international paper currency, which would lead to even more inflation.


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