 Chapter 4. The Monetary Breakdown of the West Since the first edition of this book was written, the chickens of the monetary interventionists have come home to roost. The World Monetary Crisis of February and March 1973, followed by the Dollar Plunge of July, was only the latest of an accelerating series of crises which provide a virtual textbook illustration of our analysis of the inevitable consequences of government intervention in the monetary system. After each crisis is temporarily allied by a band-aid solution, the governments of the West loudly announce that the world monetary system has now been placed on sure footing, and that all the monetary crises have been solved. President Nixon went so far as to call the Smithsonian Agreement of December 18, 1971 the greatest monetary agreement in the history of the world, only to see this greatest agreement collapse in a little over a year. Each solution has crumbled more rapidly than its predecessor. To understand the current monetary chaos, it is necessary to trace briefly the international monetary developments of the 20th century, and to see how each set of unsound inflationist interventions has collapsed of its own inherent problems, only to set the stage for another round of interventions. The 20th century history of the world monetary order can be divided into nine phases. Let us examine each in turn. We can look back upon the classical gold standard, the Western world of the 19th and early 20th centuries, as the literal and metaphorical golden age. With the exception of the troublesome problem of silver, the world was on a gold standard, which meant that each national currency, the dollar, the pound, frank, etc., was merely a name for a certain definite weight of gold. The dollar, for example, was defined as one-twentieth of a gold ounce. The pound sterling as slightly less than one-fourth of a gold ounce, and so on. This meant that the exchange rates between the various national currencies were fixed, not because they were arbitrarily controlled by government, but in the same way that one pound of weight is defined as being equal to sixteen ounces. The international gold standard meant that the benefits of having one money medium were extended throughout the world. One of the reasons for the growth and prosperity of the United States has been the fact that we have enjoyed one money throughout the large area of the country. We have had a gold, or at least a single dollar, standard within the entire country, and did not have to suffer the chaos of each city and county issuing its own money, which would then fluctuate with respect to the monies of all the other cities and counties. The nineteenth century saw the benefits of one money throughout the civilized world. One money facilitated freedom of trade, investment, and travel throughout that trading and monetary area, with the consequent growth of specialization and the international division of labor. It must be emphasized that gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money, as the commodity providing the most stable and desirable monetary medium. Above all, the supply and provision of gold was subject only to market forces and not to the arbitrary printing press of the government. The international gold standard provided an automatic market mechanism for checking the inflationary potential of government. It also provided an automatic mechanism for keeping the balance of payments of each country in equilibrium. As the philosopher and economist David Hume pointed out in the mid-eighteenth century, if one nation, say France, inflates its supply of paper francs, its prices rise. The increasing incomes in paper francs stimulate imports from abroad, which are also spurred by the fact that prices of imports are now relatively cheaper than prices at home. At the same time, the higher prices at home discourage exports abroad. The result is a deficit in the balance of payments, which must be paid for by foreign countries cashing in francs for gold. The gold outflow means that France must eventually contract its inflated paper francs in order to prevent a loss of all of its gold. If the inflation has taken the form of bank deposits, then the French banks have to contract their loans and deposits in order to avoid bankruptcy as foreigners call upon the French banks to redeem their deposits in gold. The contraction lowers prices at home and generates an export surplus, thereby reversing the gold outflow, until the price levels are equalized in France and in other countries as well. It is true that the interventions of governments previous to the 19th century weakened the speed of this market mechanism and allowed for a business cycle of inflation and recession within this gold standard framework. These interventions were particularly the government's monopolizing of the mint, legal tender laws, the creation of paper money, and the development of inflationary banking propelled by each of the governments. But while these interventions slowed the adjustments of the market, these adjustments were still in ultimate control of the situation. So while the classical gold standard of the 19th century was not perfect and allowed for relatively minor booms and busts, it still provided us with by far the best monetary order the world has ever known, an order which worked, which kept business cycles from getting out of hand and which enabled the development of free international trade, exchange, and investment. Two. Phase two. World War I and after. If the classical gold standard worked so well, why did it break down? It broke down because governments were entrusted with the task of keeping their monetary promises, of seeing to it that pounds, dollars, francs, etc., were always redeemable in gold, as they and their controlled banking system had pledged. It was not gold that failed, it was the folly of trusting government to keep its promises. To wage the catastrophic war of World War I, each government had to inflate its own supply of paper and bank currency. So severe was this inflation that it was impossible for the warring governments to keep their pledges, and so they went off the gold standard, that is, declared their own bankruptcy, shortly after entering the war. All except the United States, which entered the war late and did not inflate the supply of dollars enough to endanger redeemability. But apart from the United States, the world suffered what some economists now hail as the nirvana of freely fluctuating exchange rates, now called dirty floats, competitive devaluations, warring currency blocks, exchange controls, tariffs and quotas, and the breakdown of international trade and investment. The inflated pounds, francs, marks, etc., depreciated in relation to gold and the dollar. Monetary chaos abounded throughout the world. In those days, there were happily very few economists to hail this situation as the monetary ideal. It was generally recognized that phase two was the threshold to international disaster, and politicians and economists looked around for ways to restore the stability and freedom of the classical gold standard. Three. Phase three. The gold exchange standard. Britain and the United States. 1926 to 1931. How to return to the golden age? The sensible thing to do would have been to recognize the facts of reality, the fact of the depreciated pound, franc, mark, etc., and to return to the gold standard at a redefined rate, a rate that would recognize the existing supply of money and price levels. The British pound, for example, had been traditionally defined at a weight which made it equal to $4.86, but by the end of World War I, the inflation in Britain had brought the pound down to approximately $3.50 on the free foreign exchange market. Other currencies were similarly depreciated. The sensible policy would have been for Britain to return to gold at approximately $3.50, and for the other inflated countries to do the same. Phase one could have been smoothly and rapidly restored. Instead, the British made the fateful decision to return to gold at the old par of $4.86. It did so for reasons of British national prestige, and in a vain attempt to reestablish London the hard-money financial center of the world. To succeed at this piece of heroic folly, Britain would have had to deflate severely its money supply and its price levels. For at a $4.86 pound, British export prices were far too high to be competitive in the world markets. But deflation was now politically out of the question for the growth of trade unions but risked by a nationwide medium of unemployment insurance had made wage rates rigid downward. In order to deflate, the British government would have had to reverse the growth of its welfare state. In fact, the British wished to continue to inflate money and prices. As a result of combining inflation with a return to an overvalued par, British exports were depressed all during the 1920s, and unemployment was severe during the period when most of the world was experiencing an economic boom. How could the British try to have their cake and eat it at the same time? By establishing a new international monetary order which would induce or coerce other governments into inflating or into going back to gold at overvalued pars for their own currencies, thus crippling their own exports and subsidizing their exports from Britain. This is precisely what Britain did as it led the way at the Genoa Conference of 1922 in creating a new international monetary order, the Gold Exchange Standard. The Gold Exchange Standard worked as follows. The United States remained on the classical gold standard, redeeming dollars in gold. Britain and the other countries of the West, however, returned to a pseudo gold standard. Britain in 1926 and the other countries around the same time. British pounds and other currencies were not payable in gold coins, but only in large-sized bars suitable only for international transactions. This prevented the ordinary citizens of Britain and other European countries from using gold in their daily life, and thus permitted a wider degree of paper and bank inflation. But furthermore, Britain redeemed pounds not merely in gold, but also in dollars, while the other countries redeemed their currencies not in gold, but in pounds. And most of these countries were induced by Britain to return to gold at overvalued parities. The result was a pyramiding of United States on gold, of British pounds on dollars, and of other European currencies on pounds. The gold exchanged standard with the dollar and the pound as the two key currencies. Now when Britain inflated and experienced a deficit in its balance of payments, the gold standard mechanism did not work to quickly restrict British inflation. For instead of other countries redeeming their pounds for gold, they kept the pounds inflated on top of them. Hence Britain and Europe were permitted to inflate unchecked and British deficits could pile up unrestrained by the market discipline of the gold standard. As for the United States, Britain was able to induce the United States to inflate dollars so as not to lose many dollar reserves or gold to the United States. The point of the gold exchange standard is that it cannot last. The piper must eventually be paid, but only in a disastrous reaction to the lengthy inflationary boom. As sterling balances piled up in France, the United States, and elsewhere, the slightest loss of confidence in the increasingly shaky and jerry-built inflationary structure was bound to lead to general collapse. This is precisely what happened in 1931. The failure of inflated banks throughout Europe and the attempt of hard-money France to cash in its sterling balances for gold led Britain to go off the gold standard completely. Britain was soon followed by the other countries of Europe. Phase 4 Fluctuating Fiat Currencies 1931-1945 The world was now back to the monetary chaos of World War I, except that now there seemed to be little hope for a restoration of gold. The international economic order had disintegrated into the chaos of clean and dirty floating exchange rates, competing devaluations, exchange controls, and trade barriers. International economic and monetary warfare raged between currencies and currency blocks. International trade and investment came to a virtual standstill, and trade was conducted through barter agreements conducted by governments competing and conflicting with one another. Secretary of State, Cordell Hull repeatedly pointed out that these monetary and economic conflicts of the 1930s were the major cause of World War II. The United States remained on the gold standard for two years, and then in 1933 and 1934 went off the classical gold standard in a vain attempt to get out of the Depression. American citizens could no longer redeem dollars in gold, and were even prohibited from owning any gold, either here or abroad. But the United States remained after 1934 on a peculiar new form of gold standard, in which the dollar, now redefined to one-thirty-fifth of a gold balance, was redeemable in gold to foreign governments and central banks. A lingering tie to gold remained. Furthermore, the monetary chaos in Europe led to gold flowing into the only relatively safe monetary haven, the United States. The chaos and the unbridled economic warfare of the 1930s points up an important lesson. The grievous political flaw, apart from the economic problems in the Milton Friedman Chicago School monetary scheme for freely fluctuating fiat currencies. For what the Friedmanites would do in the name of the free market, is to cut all ties to gold completely, leave the absolute control of each national currency in the hands of its central government, issuing fiat paper as legal tender, and then advise each government to allow its currency to fluctuate freely with respect to all other fiat currencies, as well as to refrain from inflating its currency to outrageously. The grave political flaw is to hand total control of the money supply to the nation state and then to hope and expect that the state will refrain from using that power. And since power always should be used, including the power to counterfeit legally, the naivete, as well as the statist nature of this type of program should be starkly evident. And so the disastrous experience of Phase 4, the 1930s world of fiat paper and economic warfare, led the United States authorities to adopt as their major economic war aim of World War II the restoration of a viable international monetary order, an order on which could be built a renaissance of world trade and the fruits of the international division of labor. 5. Phase 5 Bretton Woods and the New Gold Exchange Standard the United States, 1945 to 1968. The new international monetary order was conceived and then driven through by the United States at an international monetary conference at Bretton Woods New Hampshire in mid-1944 and ratified by the Congress in July 1945. While the Bretton Woods system worked far better than the disaster of the 1930s it worked only as another inflationary recrudescence of the Gold Exchange Standard of the 1920s. And like the 1920s, the system lived only on borrowed time. The new system was essentially the Gold Exchange Standard of the 1920s but with the dollar rudely displacing the British pound as one of the key currencies. Now the dollar, valued at 1.35 of a gold ounce was to be the only key currency. The other difference from the 1920s was that the dollar was no longer redeemable in gold to American citizens. Instead the 1930s system was continued with the dollar redeemable in gold only to foreign governments and their central banks. No private individuals only governments were to be allowed the privilege of redeeming dollars in the world gold currency. In the Bretton Woods system, the United States pyramided dollars in paper money and in bank deposits on top of gold in which dollars could be redeemed by currency. While all other governments held dollars as their basic reserve and pyramid their currency on top of dollars. And since the United States began the post-war world with a huge stock of gold approximately 25 billion dollars, there was plenty of play for pyramiding dollar claims on top of it. Furthermore, the system could work for a while because all the world's currencies returned to the system at their pre-World War II Pares, most of which were highly overvalued in terms of their inflated and depreciated currencies. The inflated pound sterling, for example, returned at $4.86 even though it was worth far less than that in terms of purchasing power on the market. Since the dollar was artificially undervalued and most other currencies overvalued in 1945 the dollar was made scarce and the world suffered from a so-called dollar shortage, which the American taxpayer was supposed to be obligated to make up by foreign aid. In short, the export surplus enjoyed by the undervalued American dollar was to be partly financed by the hapless American taxpayer in the form of foreign aid. There being plenty of room for inflation before retribution could set in, the United States government embarked on its post-war policy of continual monetary inflation, a policy it has pursued merrily ever since. By the early 1950s the continuing American inflation began to turn the tide of international trade. For while the United States was inflating and expanding money and credit, the major European governments, many of them influenced by Austrian monetary advisors pursued a relatively hard money policy for example, West Germany Switzerland, France, Italy steeply inflationist Britain was compelled by its outflow of dollars to devalue the pound to more realistic levels. For a while it was approximately $2.40. All this, combined with the increasing productivity of Europe and later Japan, led to continuing balance of payments deficits with the United States. As the 1950s and 1960s wore on the United States became more and more inflationist, both absolutely and relatively to Japan and Western Europe. But the classical gold standard check on inflation especially American inflation was gone. For the rules of the Bretton Woods game provided that the West European countries had to keep piling up their reserve and even use these dollars as a base to inflate their own currency and credit. But as the 1950s and 1960s continued, the harder money countries of West Europe and Japan became restless at being forced to pile up dollars that were now increasingly overvalued instead of undervalued. As the purchasing power and hence the true value of dollars fell, they became increasingly unwanted by foreign governments. But they were locked into a system that was more and more of a nightmare. The American reaction to the European complaints headed by France and de Gaulle's major monetary advisor, the classical gold standard economist Jacques Ruff, was merely scorn and brusque dismissal. American politicians and economists simply declared that Europe was forced to use the dollar as its currency, that it could do nothing about its growing problems, and therefore the United States could keep blithely inflating while pursuing a policy of benign neglect toward the international monetary consequences of its own actions. But Europe did have the legal option of redeeming dollars in gold at $35 an ounce. And as the dollar became increasingly overvalued in terms of hard money currencies and gold, European governments began more and more to exercise that option. The gold standard check was coming into use. Hence, gold flowed steadily out of the United States for two decades after the early 1950s until the United States gold stock dwindled over this period from over $20 billion to $9 billion. As dollars kept inflating upon a dwindling gold base, how could the United States keep redeeming foreign dollars in gold, the cornerstone of the Bretton Woods system? These problems did not slow down continued United States inflation of dollars and prices, or the United States policy of benign neglect, which resulted by the late 1960s in an accelerated pile up of no less than $80 billion in unwanted dollars in Europe, known as Euro dollars. To try to stop European redemption of dollars into gold, the United States exerted intense political pressure on the European governments, similar but on a far larger scale to the British cajoling of France not to redeem its heavy sterling balances until 1931. But economic law has a way at long last of catching up with governments, and this is what happened to the inflation-happy United States government by the end of the 1960s. The gold exchange system of Bretton Woods, hailed by the United States political and economic establishment as permanent and impregnable, began to unravel rapidly in 1968. 6. Phase 6 The Unraveling of Bretton Woods 1968 to 1971 As dollars piled up abroad and gold continued to flow outward, the United States found it increasingly difficult to maintain the price of gold at $35 an ounce in the free gold markets at London and Zurich. $35 an ounce was the keystone of the system, and while American citizens have been barred since 1934 from owning gold anywhere in the world, other citizens have enjoyed the freedom to own gold bullion and coin. Hence one way for individual Europeans to redeem their dollars in gold was to sell their dollars for gold at $35 an ounce in the free gold market. As the dollar kept inflating and depreciating, and as American balance of payments deficits continued, Europeans and private citizens began to accelerate their sales of dollars into gold. In order to keep the dollar at $35 an ounce, the United States government was forced to leak out gold from its dwindling stock to support the $35 price at London and Zurich. A crisis of confidence in the dollar on the free gold markets led the United States to effect a fundamental change of state. The idea was to stop the pesky free gold market from ever again endangering the Bretton Woods arrangement. Hence was born the two-tier gold market. The idea was that the free gold market could go to blazes. It would be strictly insulated from the real monetary action in the central banks and governments of the world. The idea was to stop the price at $35. It would ignore the free gold market and it and all the other governments agreed to keep the value of the dollar at $35 an ounce forever more. The governments and central banks of the world would henceforth buy no more gold from the outside market and would sell no more gold to that market. From now on, gold would go together and new gold supplies, free gold market or private demand for gold would take their own course completely separated from the monetary arrangements of the world. Along with this, the United States pushed hard for the new launching of a new kind of world paper reserve. Special drawing rights, SDRs, which it was hoped would eventually replace would serve as a new world paper currency to be issued by a future world reserve bank. If such a system were ever established, then the United States could inflate unchecked forever more in collaboration with other world governments. The only limit would then be the disastrous one of a worldwide runaway inflation and the crack up of the world paper currency. All the money, as they have been by Western Europe and the hard money countries, have so far been only a small supplement to American and other currency reserves. All pro-paper economists from Keynesians to Friedmanites were now confident that gold would disappear from the international monetary system. Cut off from its support by the dollar, these economists all confidently predicted, would fall below $35 an ounce and even down to the estimated industrial non-monetary gold price of $10 an ounce. Instead, the free price of gold, never below $35, had been steadily above $35 and by early 1973 had climbed to around $125 an ounce. A figure that no pro-paper economist would have thought was possible, as recently as a year earlier. Far from establishing a permanent new monetary system, the two-tier gold market only bought a few years of time. American inflation and deficits continued. Euro dollars accumulated rapidly. Gold continued to flow outward and the higher free market price of gold simply revealed the accelerated loss of world confidence in the dollar. The two-tier system moved rapidly toward crisis and to the final dissolution of Bretton Woods. Seven, phase seven, the end of Bretton Woods, fluctuating fiat currencies, August through December, 1971. On August 15, 1971, at the same time that President Nixon imposed a price wage freeze in a vain attempt to check bounding inflation, Mr. Nixon also brought the post-war Bretton Woods system to a crashing end. As European central banks at last threatened to redeem much of their swollen stock of dollars for gold, President Nixon went totally off gold. For the first time in American history, the dollar was totally fiat, totally without backing in gold. Even the continuous link with gold maintained since 1933 was now severed. The world was plunged into the fiat system of the 30s and worse, since now even the dollar was no longer linked to gold. Ahead loomed the dreads specter of currency blocks competing devaluations, economic warfare and the breakdown of international trade and investment with the worldwide depression What to do? Attempting to restore an international monetary order lacking a link to gold, the United States led the world into the Smithsonian Agreement on December 18, 1971. Eight. Phase Eight. The Smithsonian Agreement December 1971 to February 1973. The Smithsonian Agreement hailed by President Nixon as the greatest monetary agreement in the history of the world was even more shaky and unsound than the gold exchange standard of the 1920s or than Bretton Woods. For once again, the countries of the world pledged to maintain fixed exchange rates, but this time with no gold or world money to give any currency backing. Furthermore, many European currencies were fixed at undervalued securities in relation to the dollar. The only United States concession was a puny devaluation of the official dollar rate to $38 an ounce. But while much too little and too late, this devaluation was significant in violating an endless round of official American pronouncements which had pledged to maintain the $35 rate forever more. Now at last, the $35 price was implicitly acknowledged as not graven on tablets of stone. It was inevitable that fixed exchange rates, even with wider agreed zones of fluctuation but lacking a world medium of exchange, were doomed to rapid defeat. This was especially true since American inflation of money and prices, the decline of the dollar and balance of payments deficits continued unchecked. The swollen supply of euro dollars, combined with the continued inflation and the removal of gold backing, drove the free market gold price up to $215 an ounce. And as the overvaluation of the dollar and the undervaluation of European and Japanese hard money became increasingly evident, the dollar finally broke apart on the world markets in the panic months of February through March 1973. It became impossible for West Germany, Switzerland, France, and the other hard money countries to continue to buy dollars in order to support the dollar at an overvalued rate. In little over a year, the Smithsonian system of fixed exchange rates without gold had smashed apart on the rocks of economic reality. 9. Phase 9. Fluctuating Fiat Currencies March 1973 to With the dollar breaking apart, the world shifted again to a system of fluctuating fiat currencies. Within the West European block, exchange rates were tied to one another, and the United States again devalued the official dollar rate by a token amount to $42 an ounce. As the dollar plunged in foreign exchange from day to day, American Mark, the Swiss Frank, and the Japanese yen hurtled upward. The American authorities, backed by the Friedmanite economists, began to think that this was the monetary ideal. It is true that dollar surpluses and sudden balance of payments crises do not plague the world under fluctuating exchange rates. Furthermore, American export firms began to shortle that falling dollar rates made American goods cheaper and therefore benefited exports. It is true that governments persisted in interfering with exchange fluctuations, dirty instead of clean floats, but overall it seemed that the International Monetary Order had sundered into a Friedmanite utopia. But it became clear all too soon that all is far from well in the current international monetary system. The long run problem is that the Americans will not sit by forever and watch their currencies become more expensive and their exports hurt for the benefit of their American competitors. If American inflation and dollar depreciation continues, they will soon shift to the competing devaluation, exchange controls, currency blocks, and economic warfare of the 1930s. But more immediate is the other side of the coin. The fact that creating dollars means that American imports are far more expensive. American tourists suffer abroad, and cheap exports are snapped up by foreign countries so rapidly as to raise prices of exports at home. For example, the American wheat and meat price inflation. So that American exporters might indeed benefit, but only at the expense of the inflation-ridden American consumer. The resulting uncertainty of rapid exchange rate fluctuations was brought starkly home to Americans with the rapid plunge of the dollar in foreign exchange markets in July 1973. Since the United States went completely off-gold in August 1971 and established the Friedmanite fluctuating fiat system in March 1973, the United States and the world have suffered the most intense seemed bout of peacetime inflation in the history of the world. It should be clear by now that this is scarcely a coincidence. Before the dollar was cut loose from gold, Keynesians and Friedmanites, each in their own way devoted to fiat paper money, confidently predicted that when fiat money was established, the market price of gold would fall promptly to its non-monetary level, then estimated at about $35 an ounce. In their scorn of gold, both groups maintained that it was the mighty dollar that was propping up the price of gold and not vice versa. Since 1971, the market price of gold has never been below the old fixed price of $35 an ounce and has almost always been enormously higher. When during the 1950s and 1960s, economists such as Jacques Ruff went for a gold standard at a price of $70 an ounce, the price was considered absurdly high. It is now even more absurdly low. The far higher gold price is an indication of the calamitous deterioration of the dollar since modern economists had their way and all gold backing was removed. It is now all too clear that the world has become fed up with the unprecedented inflation in the United States and throughout the world that has been sparked by the fluctuating fiat currency era inaugurated in 1973. We are also weary of the extreme volatility and unpredictability of currency exchange rates. This volatility is the consequence of the national fiat money system, which fragmented the world's money and added artificial political instability to the natural volatility in the free market price system. The Friedmanite dream of fluctuating fiat money lies in ashes and there is an understandable yearning to return to an international money with fixed exchange rates. Unfortunately, the classical gold standard lies forgotten and the ultimate goal of most American and world leaders is the old Keynesian vision of a one-world fiat paper standard, a new currency unit issued by a World Reserve Bank, WRB. Whether the new currency be termed the Bankor, offered by Keynes, the Unita, proposed by World War II United States Treasury official Harry Dexter White, or the Phoenix, suggested by the Economist, is unimportant. The vital point is that such an international paper currency, while indeed free of balance of payments crises, since the WRB could issue as many bankors as it wished and supply them to its country of choice, would provide for an open channel for unlimited worldwide inflation unchecked by either balance of payments crises or by declines in exchange rates. The WRB would then be the all-powerful determinant of the world's money supply and its national distribution. The WRB could and would subject the world to what it believes will be a wisely controlled inflation. Unfortunately, there would then be nothing standing in the way of the unimaginably catastrophic economic holocaust of worldwide runaway inflation. Nothing, that is, except the dubious capacity of the WRB to fine-tune the world economy. While a worldwide paper unit and central bank remain the ultimate goal of the world's Keynesian-oriented leaders, the more realistic and proximate goal is a return to a glorified Bretton Woods scheme except this time without the check of any backing in gold. Already, the world's major central banks are attempting to coordinate monetary and economic policies, harmonize rates of inflation and fix exchange rates. The militant drive for a European paper currency funded by a European central bank seems on the verge of success. This goal is being sold to the gullible public by the fallacious claim that a free trade European economic community, EEC, necessarily requires an overarching European bureaucracy, a uniformity of taxation throughout the EEC, and in particular, a European central bank and paper unit. If achieved, closer coordination with the Federal Reserve and other major central banks will follow immediately. And then, could a world central bank be far behind? Short of that ultimate goal, however, we may soon be plunged into yet another Bretton Woods with all the attendant crises of the balance of payments and Gresham's law that follow from fixed exchange rates in a world of fiat monies. In the face of the future, the prognosis for the dollar and for the international monetary system is grim indeed. Until and unless we return to the classical gold standard at a realistic gold price, the international monetary system is fated to shift back and forth between fixed and fluctuating exchange rates, with each system posing unsolved problems, working badly, and finally disintegrating. And fueling this disintegration will be the continued inflation of the supply of dollars and hence of American prices, which show no sign of abating. The prospect for the future is accelerating and eventually run away inflation at home accompanied by monetary breakdown and economic warfare abroad. This prognosis can only be changed by a drastic alteration of the American and world monetary system by the return to a free market commodity money such as gold and by removing government totally from the monetary scene.