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Johnsons social programs. Americas foreign policy increasingly meant spending lots of dollars in other
countries on foreign aid, defense and military spending and international investment and trade. As a result,
lots more dollars flowed into the treasuries of other nations, and much less capital flowed back into the
U.S. Treasury, resulting in imbalances.
From the 1950s on, the U.S. government and the Fed undertook a series of interventions in the free market
designed to bring the U.S. monetary system back into balance. As always ultimately happens whenever
authorities interfere with the workings of the free market, for every action taken, there were unintended
and usually destructive consequences. Long-term interest rates kept artificially low encouraged foreign
borrowing and discouraged domestic investment. To counter
French President Charles de Gaulle, who had a bone to pick with the United States, opposed the use of the
dollar as the worlds reserve currency. France began buying up dollars and redeeming them in gold,
seriously depleting the supply of gold in the U.S. Treasury.
As described by HistoryCentral.com [1]:
By the end of the 1960s, it was clear that the ills plaguing the international monetary system and
the American dollar would have to be addressed at a basic level. The Kennedy and Johnson
Administrations had applied solutions to the mounting balance of payments crisis that were at best
patch-up jobs, postponements of the inevitable. The balance of payments was off-balance, the
dollar was overvalued, inflation was picking up speed, and the United States could do little to
restore economic order without compromising major aspects of domestic and foreign policy.
In the end, the United States was not able to meet its commitment to the rest of the world under the
Bretton Woods system to keep the U.S. dollar pegged to gold at the rate of $35 per ounce. The bottom line
is that Bretton Woods did not allow the United States the flexibilityread the ability to create as much
currency as it neededto fund its foreign and domestic policy goals.
By 1971, the United States was essentially bankrupt; it did not have enough gold in the Treasury to
redeem all the dollars in circulation.
That year, President Nixon severed the link between the U.S. dollar and gold. With his act, in effect, every
currency in the worldthanks to the dollars status as the worlds reserve currencybecame fiat
currency.
Now, fiat currency is not backed by gold or any other tangible asset. The only thing backing fiat currency
is the good faith of the peoplefaith that the value of the currency will be sustained by a governments
future taxing of its taxpayers. As Michael Maloney wrote in his book [2]:
A fiat is an arbitrary decree, order, or pronouncement given by a person, group, or body with the
absolute authority to enforce it. A currency that derives its value from declaratory fiat or an
authoritative order of the government is by definition a fiat currency.
Now unencumbered by U.S. and world monetary policy, the free market bid the price of gold up until, in
1980, when gold reached $850 per ounce before falling, the value of the gold held at the U.S. Treasury
exceeded the total value of base moneythe total of dollars in circulationplus all the dollars existing in
the form of outstanding revolving credit.(For more information about pressures that drove gold back
down, see the WealthCycles.com article, How The Hunt Brothers Capped the Price of Gold [3].)
At WealthCycles.com, we measure the amount of currency in circulation by adding the
number of dollars in circulation and in bank reserves (base money) to the total of dollars
represented by outstanding revolving credit, which is mostly in the form of unpaid credit
card balances. Thats because, whenever you charge a purchase to your credit card, in
effect new currency is created in the amount of your charge. That new currency stays in
circulation until you pay off your credit card balance. In many ways credit cards are
replacing cash as a medium of exchange and must be included in measuring the total cash,
and its digital equivalent, in our modern-day monetary system.
increasingly, if not impossible, to pay off the debt that backs each unit of. If you look beneath the surface,
the strength of the U.S. economy and the financial position of the U.S. taxpayer look shakier than at any
time in history. The official U.S. national debt today is $127,000 per taxpayer, and when you add in
consumer debt, mortgage debt, and credit card debt, it brings the total to more than $500,000 in debt for
each taxpayer. If you throw in the United States unfunded liabilities, such as Social Security and
Medicare, the total comes to more than $1 million in debt per taxpayer. None of these numbers is
sustainable, especially when there are 26 million people in the U.S. who are unemployed or
underemployed.
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