We all heard about the Gold Standard that the United States Dollar operated under. It was a time that the USD was backed by gold. This, to many, gave it validity. These same people view Nixon's removal of the gold standard as catastrophe that is dooming us all.
The reality of the situation is that it is all a myth. The Gold Standard did not truly exist.
Like most things, many espouse ideas that are not accurate.
Sound Money
The belief in sound money is that it cannot be arbitrarily expanded. Many people feel that removing the Gold Standard set the world for dealing for a Fed that prints money as it sees fit. Of course, anyone who knows how it works understands the Fed does not create USD. A quick read of the Federal Reserve Act shows how the Fed does not create legal tender. Hence, it is not in the money game.
One of the biggest flaws in sound money is that it is impossible to achieve money equilibrium. Free markets mandate that supply has to meet demand. This is what the Fed wants people to believe it does. The reality is that it is not within its power. It is the commercial banking system that generates the USD.
What is overlooked in the Gold Standard Myth is the fact that banks were creating convertible notes throughout this period of history. So, while the Gold Standard was in effect, the commercial banking system was providing monetary elasticity to the system. If not, economic expansion could not take place, especially to the degree that occurred coming out of the Great Depression.
Few take the time to ask where all the money came from to provide for that growth? If they did, they would quickly realize that monetary expansion was taking place.
The Eurodollar System
This is the second piece of the puzzle that few actually understand. It is also what made the Gold Standard really a moot point.
Internationally, the USD in foreign banks was used to generate more money. This started in the late 1940s/early 1950s. Thus, by the early 1970s, the Fed has no idea what money even was. The international banking system was creating money as it saw fit and not even telling the Fed. Hence, they (the Fed) had no idea what was even taking place. The Eurodollar system operates outside the control of any central bank or government.
Therefore, when Nixon removed the United States from the Gold Standard, he was just killing a dead animal. The global reserve currency was not the USD but the Eurodollar. This does not mean the USD in foreign banks per se but, rather, the entire monetary system that was built upon it.
This also conveniently solved Triffin's Dilemma for the Fed, something it and the US Congress managed to botch up in ensuing decades. It is also what is putting us in the situation we now find ourselves in.
Monetary Elasticity
Few consider monetary elasticity to be something important yet it is the foundation of a free market system. There is little debate that markets expand and contract. The same is true for economies.
At times, the demand for money increases. When this happens, it is imperative that the money supply expand to match. The idea of fixed money cannot meet this criteria, especially when it is a reserve currency. One of the pillars of a global reserve currency is flexibility (this is why Bitcoin will never serve in this role).
Of course, there was a more practical matter with the Gold Standard for the US Government. All the USD could be redeemed for gold, at $35 an ounce. The problem is the US was having all its gold sucked from its hands. Fortunately for it, they were able to steal (confiscate) is back from other countries over the ensuing decades.
While the Gold Standard is a romantic time period for some, it actually never existed. Domestically the commercial banking system was creating convertible notes to when the demand for more money hit. This was compounded by the explosion of the Eurodollar system internationally that went parabolic for 50 years. Global trade fed into this system as the US increased it imports, thereby flooding the international system with USD.
Unfortunately for the world, contraction began as the US began to run up huge deficits. This brought a lot of USD back into the domestic banking system, a problem compounded post-GFC by the Fed's QE programs, locking USD into the banking and financial sectors. This served to starve the global economy of the USD, contracting the Eurodollar system.
This is one of the reasons why our global growth rates are far behind the period preceding this. By some estimates, we are down $40T-$50T in global GDP compared to where is should be. That is a lot of loss wealth over the past 15 years.
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