The Currency Experiment Has Failed

In 1971 President Nixon closed the window that allowed US Dollars to be sold for gold owned by the US. Just before that, the price of gold was $35 an ounce. Since then gold has been called a ‘barbarous relic’, a term used in an earlier era by Keynes, the famous economist.

From that time on, the world’s currencies stood merely on the confidence their governments engendered and the control they exercised over international financial dealings of all kinds. That confidence lasted until 2007 when the credit crunch brought government financing on both sides of the Atlantic into question.

Up until now the performance of the underlying value of currencies has hidden these questions as exchange rates are adequately ‘managed’ through swap arrangements to stabilize exchange rate movements to the extent that violent moves don’t happen. But the real value of currencies in terms of their real solvency is now a matter of open debate. As of now, relative to the amount of gold available to markets, the price of gold is the only measure of value that currencies can be held to. We look at that and look at the conditions that are determining the value of currencies now and in the future.

When Nixon closed the ‘gold window’ to European governments in 1971 he relied on the oil producers of the world to price oil in US Dollars only. This made the USD a necessity. Except for the few oil producers who refine their own oil, every country needs to import oil after using the US Dollar to buy it. This gave the US the control they needed over currency markets, to ensure that the Dollar became and remained the sole global reserve currency until now.

A look at the Euro, which – although it’s the currency of world’s largest trading bloc— shows that if a currency is measured solely on the performance of its government and Balance of Payments, it remains vulnerable to market forces that react to that measurement. With oil in backup, that vulnerability fades. That is, until profligate printing of that government’s currency becomes so obvious that it cannot be ignored. This is where the US Dollar is coming to now.

The ‘currency experiment’ has persisted for 41 years, but for the last five, it has faltered and continues to do so. With the focus on the short-term, the real consequences of that experiment have been largely ignored. It’s time to take a more distant view of what has happened so that we can get a balanced perspective of its cost.

During the 42 years of the currency experiment with no gold or silver standing behind currencies we have seen the gold price multiply from $35 to $1,770. That’s over 50 times in 42 years. And there’s still much more to come it seems, with the assistance of governments.

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