Under the Bretton Woods Agreement of 1944 the US government undertook to redeem its dollars at $35 for an ounce of gold. US gold holdings then stood at 574 million ounces, more than 50% of the world’s total, worth just over $20 billion at that conversion rate.

By anchoring the dollar to a defined unit of gold, the government was prevented from increasing the number of dollars in issue without a corresponding increase in its gold holdings.

Over the next few years Germany and Japan staged a dramatic post-war recovery, causing the Deutschmark and Yen to rival the dollar as a trading currency of choice, particularly when America embarked on its damaging war in Vietnam and a series of uncosted social programmes that resulted in balance of payments and trade deficits.

By 1971 USA gold holdings had fallen to only $10 billion. Dollars held by foreign banks exceeded America’s redemption abilities. President Nixon succumbed to the pressure by ‘suspending’ dollar/gold convertibility, effectively abandoning what was left of the gold standard – and, with it, the only financial discipline that guaranteed purchasing power stability.

And now? The US owns 261 million ounces of gold, and its broad money supply measures $10.5 trillion dollars. A re-enacted conversion regime would therefore require $40,230 for a single ounce of gold. This is simply another way of noting that since 1944 the US government, through the Federal Reserve, has managed to inflate the dollar from $35 per ounce to over $40,000 per ounce – more than a thousand-fold debasement.


The role played by banks has been central to perpetuating the myth that money can be uncoupled from what it is supposed to represent. Debt is an asset only if it can be repaid, but banks display a mindset that divorces the making of loans from any consideration of borrowers’ ability to repay.

Surely they have auditors? But auditors regard ‘true and fair’ as equivalent to compliance with accounting rules, even when common sense tells you that they are utterly misconceived. The report of the Parliamentary Commission on Banking Standards, published in June, articulates the point with commendable clarity: “Audited accounts conspicuously failed accurately to inform their users about the financial condition of banks”.

We should not be surprised. The act of disregarding the intrinsic meaning of money, in any context, is inseparable from the act of debasing it. The consequences of uncoupling the money supply from an anchor such as gold are not merely financial. Far more damaging is the psychology of being able to conjure up money at will, at no cost, and believing that wealth is magically increased thereby.

If government can settle its debt obligations by simply debasing the currency of repayment, why should citizens take responsibility for their own debts more seriously? Why should public sector unions link demands for more money to higher productivity when they know that their government paymasters can meet those demands by tweaking the printing press?

It’s not just the money supply that is disconnected. Political leaders demonstrate how ‘unhinged’ they themselves are when they expect the central bank to meet bailout demands with baseless fiat money. The disease is contagious and worms its way into the cultural psyche. Why else would French or Greek workers take to the streets when their leaders renege on the stupid promises on retirement age, pension rights and welfare entitlements that got them elected?

The question they never ask: Where will the money come from?