 Good morning everyone my my topic this morning is the gold standard versus the versus fiat money And what I propose to do is to show you how The a sound money a commodity money a money supplied by the market was transformed step-by-step by government actions into a fiat money Who supply and value is completely subject to to the arbitrary Whims of politicians So let's let's start with a spectrum spectrum of international monetary systems If you'll note all all the way on the left, you have the best systems money came into existence as 100% either silver or gold standard Okay, we know that that money developed from border as a useful good or services that was previously exchanged in border the actual goal and now government began into intervening and Taking over some of the functions of money or some of the operations that involve money by the Middle Ages And certainly even before then And so that by the 19th century though we had a sound money and though you could still say that it was a market supplied money it was There was there was a number of different government interventions into the system But this is the standard that I propose to talk about the classical gold standard and Step-by-step this standard was transformed as I mentioned into a standard which we have today which is Right here a false gold standards. Okay, they they they were part of the expression of government power but By 1971 even the false gold standards were gone. We'll go through that and we had Now we have either freely floating exchange rates, which is not really the case What we have is really dirty floating where there are different national fiat currencies that are produced by different central banks and They fluctuate in value against one another although the government intervenes to To to hamper that the the the changes in value against one another that is they some countries for example China wants to keep their Their currency artificially cheap other countries may want to hold the value of their their currency high So it's called dirty floating or managed floating So we'll talk about the various stages of the transformation Okay, so what was the classical gold standard or its main? Characteristics as I said government was involved. There were the war central banks During the era of the classical gold standard though the US did not have one So it's basically first of all the military unit is defined as a weight of gold Go so therefore gold and nothing else is money the bank knows and deposits that are issued are Converted or redeemed at face value So if you have a 10 if you have a $20 bill During the classical gold standard in the 19th century you could go to any branch of the Treasury or you go to a bank and In exchange you would get About an ounce of gold Okay, so as we'll see in a moment of the value of Announce of gold was defined as About 120th of an ounce Or rather the dollar was defined as 120th of an ounce Gold coin is in circulation along with bank notes and deposits, okay, and Finally a central bank may or may not exist. It did exist in most Industrialized countries or industrializing countries during the 19th century, but it did not exist in the US the money unit Under the gold standard the currency name is simply the name for a particular weight of gold So in the US for a hundred years from 1834 to 1933 Gold or the dollar was legally defined as approximately 120th of an ounce of gold or 23.22 grains of gold and In Great Britain for over a hundred years the pound was legally defined as Equal to about a quarter of an ounce of gold. Okay, which is about 113 grains of gold French Frank was defined as about a 100th of an ounce of gold and so on So the money unit again is a certain weight of gold All countries are on the gold standard Pounds dollars Franks are just different names for Different weights of gold. They are all gold money So here are $20 and $5 gold coins from 1921 and 1906 respectively They don't look much different from the British sovereigns that Existed again in 1894 and in 1931 You could go with with America with it with for example American gold coins You go to Britain and you could purchase things in Britain if you were a tourist To the extent that they had confidence in the stamp on the US gold coin. They would accept them by weight So on the 19th century you could not only did you not need a passport to go to travel anywhere in Europe except for for Russia and the United States, but You just needed to bring gold or silver with you. You could have your own country's Coins and they would be accepted as money. So there was one money and there was you know free movement of people and They went together. I mean, this is really the glory of classical liberalism What about exchange rates or their exchange rates under the gold standard? So if two cows are traded for one horse, we say there's an exchange rate between these two different goods two to one That that's the exchange rate or one half of a one half of a horse for a cow. That's the exchange rate That's simply the reciprocal But is that true under the gold standard? For example, it's been said that for that hundred years Since there was about five times the amount of gold in a British pound as it was an American dollar that there was a fixed exchange rate It was approximately four dollars and it was four dollars and eighty six cents plus or minus one percent But this is not an exchange rate in the economic sense of the word This is an exchange rate always refers to a ratio between two different goods But the pound and the dollar are part of the same good For example, if I said there's an exchange rate between the US nickel and the US quarter Okay, that five nickels purchase one quarter, but that's that's not that's not an exchange rate It's simply a little arithmetic because a nickel is defined as one twentieth of a dollar a quarter is defined as one quarter of a dollar So there was five times the amount of a dollar represented by a quarter as there is by a by a nickel Okay, so that's very important. It's not a system of fixed exchange rates. No one's doing the fixing There's just simply one money and I emphasize that here. Okay Now let's talk a little bit about paper currency under the gold standard Okay, the the bank deposits and and and the currency notes that were issued under the gold standard by private banks or by the central bank We're not in and of themselves money proper They were simply money substitutes. They were claims to gold Okay, that were or warehouse receipts for gold that was being stored either by the bank or by the Treasury That circulated in lieu of the actual gold coins for reasons of security convenience and so on So when you accepted Let's say a currency note what you were accepting was title or Claim to a gold coin stored some at some specific place So you were trading titles to things. Okay, think of the claim checks you receiving a drop-off your your shirts or Dresses at a dry cleaner. Okay the the claim itself only has Value to the extent that it refers to an underlying good or service same thing is true You know coach check and so on or if you let's say you're a you grew up like me among people in New Jersey who like to race cars and Drag race informally on public roads late at night They would race for pink slips so they would in other words give the pink slip to the winner pink slip being the title to the car Okay, but obviously that was not the value. That's not what they expected. They expected the car Okay, to which that that pink slip Okay, what was the claim? Okay, so just to give you some examples here note now until the 1920s private banks could not only issue Deposits checking deposit money. They could also issue currency notes Eventually the government put heavy taxes on them as we'll see during World War one the US government and then and then Band them out right in the 1920s, but for example, here's a claim for $20 from 1903. This is not the money itself This is a money substitute notice what it says the Farmers and merchants Bank of Los Angeles will pay to the bearer on demand twenty dollars That's not the twenty dollars You're gonna it's a promise to pay twenty dollars What is the twenty dollars the twenty dollars of the gold coins? Okay, in this case a one ounce of gold Another example the First National Bank of Fort Myers will pay to the bearer on demand five dollars That's not the dollar that those those aren't the dollars Okay, even the US Treasury Couldn't circulate its money without it was couldn't circulate its notes. Excuse me. It's not money without Having a claim or evidence that it was a claim to gold. So the United States $100 in gold coin repayable to the bearer on demand So you you you you deposit the gold coin and in exchange you got the US Gold what's called a gold certificate? Okay, it's a right to claim the gold okay, so so that's that's an idea of the basics of the of the gold classical gold standard And it's important to realize it did not involve price-fixing Chicago economists the followers of Milton Friedman the monetarists often say that well gold is we don't understand why Some free market economists i.e. the Austrians support a gold standard because a gold standard is simply a price-fixing scheme on a Very grand scale that is the government is fixing the price of gold by being willing to buy Gold at $35 an ounce But we but but as Austrians we reply of course that's not that's not the case It's not a price-fixing scheme Okay, what the government is doing in paying out $35 in gold or before 19 1946 under the gold standard was $20 in gold in paying out an ounce of gold for $20 it was fulfilling its contract Wasn't fixing a price So in other words you had to sell gold for dollars freely in order to keep the price fixed Okay, just as if you if you want to keep the price of wheat fixed at $5 The government has to sell from from its weeks wheat stock all the week that people want to buy at a price of $5 and vice versa It has to buy up all the week people present to it at $5 that is a price-fixing scheme. This is not a price-fixing scheme This is simply fulfilling the contract and of course in the long run once you have a gold standard then The amount the the money supply is strictly limited Not day by day, but certainly in the the short intermediate run It's strictly limited by the amount of gold flowing into the into the country from from gold mines or through the balance of payments So the gold standard was often called golden handcuffs There were handcuffs on government that prevented it from arbitrarily manipulating the money supply now as a result because The supply of money in the 19th century grew very very slowly Compared to how the supply of goods was growing Or was growing you had a situation where prices tended to fall under the gold standard especially after the civil war when the US was industrializing so prices tend to fall over time because people new technology was coming in people were saving more and We had as a result more funds for investment which then took advantage of these new technological projects and We that resulted in an increase in productivity of labor So real goods and services were increasing much more quickly than was the money supply and as a result We have what I call a growth deflation so probably if you've taken Principles of economics or or intermediate macroeconomics You've been told that In order to have growth you have to have inflation that inflation and growth go together as a price level rises Growth growth will will increase or if you have growth To support that growth you have to have an increase in the money supply that at least keeps prices stable if not rot raises them But of course if you look on any market if you look on markets today You'll see that in those industries which are growing the fastest Prices are falling so lacy guy surgery for example we get new technological innovations coming in It used to be three thousand dollars per eye in the late 1990s and now it's three hundred dollars per eye If you look at cosmetic surgery Okay, that is surgery that is elective surgery that that is not covered by insurance or by the government Medicare Prices are going down because there's new technology and and and lowering of costs and and price are following so in those industry HDTVs and Tablet computers and so on they have their prices falling because those are industries in which supplies of goods and services are increasing more rapidly than the increase in the money supply That's the natural Tendency of a free market capitalist economy. It's for prices to continually fall That's exactly what happened between 1880 and 1896 when there were new new gold discoveries and more gold came into the market but prices fell by about two or three percent in the United States during that period and That was the most rapid period of growth in the United States. The 1880s was the the the highest Rate of decadal growth that is the decade which in which the decade in which the economy grew the most in American history And that was during a period of falling prices So actually I have some figures up here for you from 1880 to 1896 you had a fall in price of about 30 percent price with 30 percent lower 16 years later And that meant that price were falling by about one and three quarters percent per year But at the same time GDP real GDP went up by eighty five percent or five percent per year Extremely rapid growth by today's standards. Even when the US economy was doing well in the 1950s and 60s into the early 70s We were growing it no more than three percent per year But to have sustained growth of five percent per year is amazing and there you see a picture of What happened during the 19th century? So from 1809 from 1812 to 1815 we had a war with The war of 1812 with the British Murray Rothbard once said that America and Great Britain Were on the wrong side of every war they fought Except for the American Revolution and the War of 1812 he said well the American Revolution the Americans were right On the right side and in the War of 1812 the British were on the right side So but in any case we also had the first Bank of the US which was printing money So you see that big blip in in the price level there before 1820 okay that resulted eventually in the Panic of 1819. Okay, that was a result of paper money Once the bank was was not rechartered once Jefferson won his war against the bank Prices fell again as we went back to a gold standard And then once again you'll see that big blip there in the 19th century that well That's obviously the paper money the green backs that were printed to pay for the Civil War Okay, but once those green backs were retired and We went back to the classical gold standard. We had a fall in the price level Continual fall okay Prices rose very slowly from 1896 to 1914 in the US people called it a great inflation the reason why was because there was a there was a New gold sources found in the Yukon and found in in South Africa And and so the gold was coming into the US But what they call the great inflation was a 13% inflation that is prices rose by 13% Oh between 1896 and 1914 that's less than 1% per year in today's terminology. That's deflation We can't have any prices falling rising by less than 2% per year. Otherwise, we're gonna get a deflation Okay, and all its so-called so-called horrible, you know effects and consequences So let me just talk about the boom and bust there were booms and busts during the classical gold standard because there was there was a fractional reserve banking But fraction reserve banks could only really temporarily increase the money supply Okay, because they would begin to lose gold as prices rose people began to purchase more imported goods which were cheaper and Were discouraged from purchasing domestic goods so gold flowed out of the country Okay, but for a period as as the fractional reserve banks were increasing the money supply You did get lower interest rates. You got inflation of prices and you got many bad loans and investments and bad production processes So you did you would have periods of false prosperity So we had the Panic of 1819 though. That was a paper money panic, but we but we had a 1857 in 1873 and then in the 1890s 1907 but that That wasn't due to the class the classical gold standard per se But to the fact that there was fractional reserve banking So money became a loose joint to some extent money supply could be increased by fractional reserve banks By lowering the ratio of reserves that they were holding But it would inevitably end in a recession or bust and you had many businesses and banks going out of business Which was a good thing for the banks because then they would wait a while before they began inflating the money supply again Okay, they would have learned their lesson But but because in the 19th century the government didn't interfere in labor markets prices would fall very rapidly a Businesses would know that they were not going to get bailed out So wage wages would fall prices would fall and they would reestablish themselves at a level that was adjusted to the money supply And you get the profit margins opening up again, and eventually We would get production Restorted and we'd get more hiring and we'd come out of the recession fairly very quickly the last good recession or depression We had was in 1920 21 when it was an immense fall and tremendous fall in prices but it only lasted about nine months and Then we return to normalcy as I guess was president Coolidge said but these these business cycles were minor compared to what occurred after After the the the Central banks began to try to stabilize the price system and began to manipulate the money supply and interest rates that really began after World War one or Or Really at the beginning of World War one all governments went off the gold standard within two weeks of the outbreak of World War one all belligerents went off the gold standard Because gold would have restrained their military spending. I mean remember in in In the Middle Ages under the during the age or late middle age during the age of royal absolutism You armies would would would stop fighting because they weren't being paid and they would just go home and sometimes they would kill a king Which would be a good thing Because they couldn't come up with the funds under a gold standard to pay to pay for these these various military expenditures Okay Now there's a song I'm gonna go through this fairly quickly There's something called a balance of payments adjustment mechanism, which was the mechanism which restrained the central bank or the fraction reserve banks from Perpetrating a really big inflation so under the gold standard. It was really an automatic mechanism I'd rather call it. I don't like the word automatic, but it was a spontaneous process Let's say in which all into individuals were involved all individual buyers and sellers and so on So what would happen? Let's say the sense. Let's say you it's a great Britain You have the Bank of England, so they would increase their Notes And the notes then would would would be the reserves and I'll show you a picture of this in a moment for for the banks The bank would have more reserves They had the Bank of England notes and they would therefore loan out more and so you get an increase the money supply British prices would go up above world prices Okay, and there's there's the immediate beginning of the reaction against the increase the money supply that you get under the Gold standard because once that happened You would have people buying less of the domestic goods British subjects buying fewer domestic goods and buying more Goods from the rest of the world, which is also on the gold standard and where prices would be lower So imports would go up exports would decrease how you to pay for the extra exports There'll be a balance of payments deficit We buying more abroad and owing more more money abroad than you would Then then would be purchased from from from your economy And so gold would then flow out the foreign countries the foreign countries didn't want your bank notes They even if they were from the from from the central bank They wanted was gold so banks central banks and private banks would begin losing gold And as they fell people would see the gold flowing out of their banks and they begin to get worried and There would be either actual bank runs or the threat the imminent threat of bank runs and that would be enough to stop the inflation So banks would then try to reduce the amount of notes and deposits they had in circulation They would start reduce their lending and the domestic money supply would fall back and As it did prices would fall back to world levels the balance of payments would go back to Being basically in equilibrium and gold would not continue to flow out of the country In fact prices would tend to fall even below what world prices were and If they contracted the money supply enough and then gold would flow in because your economy would have lower prices than the rest of the World so you'd export more Okay, and Once that happened though you would get a recession as we as we talked about but again It would be a recession that would get over very very quickly because the government for the most part and the central bank Also did not intervene Now here's an example of what's called the money pyramid Which existed under the gold standard? So note the very bottom. Let's say a central bank had in its coffers $2 billion in gold And let's say they they by law or by the fact that they were prudent wanted to keep 40% reserves Okay of gold against the notes they issue so the central bank then could now ignore the The the red the figures in red font, please and just look at The black font, okay So if the reserve ratio was 40% well then two billion dollars would be 40% of five billion So so the central bank would be able to issue five billion dollars worth of notes those notes would then become the reserves for the Commercial banks which also were able to issue their own notes and deposits So they would hold let's say their reserve ratio was 20% so if there were five billion dollars of Notes from the central bank at that they were holding as reserves. They could then issue five times as many Notes and deposits, so let's say the total money supply was 25 billion dollars Okay, and let's say that the central bank suddenly started to inflate the money supply. Let's say they increased The their note issue by one billion dollars. They went from five billion to six billion dollars So their reserve ratio would fall now they would only be holding about a third Or a third of their notes would be backed by gold But those notes would get into circulation There would be deposited in the banks which would then hold them as reserves and as a result They would have now a billion more Dollars in reserves to loan out under fraction reserve banking if it's a 20% reserve ratio that could be multiplied five fold So the money supply would would increase by five billion dollars so now you would have the money supply increasing from 25 billion to two to 30 billion which is a 20% increase in the money supply You can imagine prices would shoot up above world prices and what would happen You would get that balance of payments adjustment mechanism Because price was so high in your country and was a bad place to to buy and a good place to sell You'd be getting a lot of imports very you'd be you'd be having very few exports and gold would flow out of the country Okay, and as gold flowed out remember now There's 25 30 billion dollars out there that is a claim on ultimately two billion dollars worth of gold So not only was gold flowing out Not only do we have what's called the next external grade of gold the foreign countries People would start getting worried and would start turning in there They're they're they're checking the power withdrawing money from their checking deposits or turning in their notes in exchange for gold So there would be an internal drain of gold So that gold stock would start shrinking and at that point the central bank would immediately pull in the reins and reduce the money supply and That would reverse the process and the gold would flow back in Now where the destruction of sound money begin began with World War one. Okay, and actually before World War one When president Wilson signed the Federal Reserve Act right before Christmas of 1913 Establishing a bank the Federal Reserve Bank, which was the central bank of the United States It was supposed to be decentralized. There are 12 different districts 12 different reserve banks and But but it really was eventually controlled from Washington. Okay, initially was New York was a dominant bank Okay So what was the result? Well to begin with the classical gold standard existed the existed from about 1834 to 1933 in the US sort of Okay, it really didn't exist after World War one But there was still some remnants of it that did constrain government But during World War one now that you had the Fed the gold reserves were centralized in the Fed It became more all banks had to hold gold their gold reserves in the central bank And they then had to hold the Federal Reserve notes and that got people accustomed to caching in there where they deposited a check or or a note they would get not the gold but another note in In return So that so you turned in you know $10 note from your bank or if you withdrew $10 from your checking account at your bank They would give you Federal Reserve notes. Now you could insist on gold But that was considered to there was a propaganda campaign against gold that this is an old-fashioned way of doing things No one carries gold around their pockets. It's it's inconvenient unsafe and so on right, so Americans became accustomed with that centralization of gold reserves to central bank money as dollars Hey, people began to think as of gold as backing dollars and dollars being the Fed Federal Reserve note or the Treasury note Heavy tax was placed on the private issue of bank notes So they were trying to stamp out the private issue of bank notes so that people will be more focused on the on the Central bank note as as the money Okay, and the export of gold was prohibited for a while in 1917 You couldn't send gold abroad to pay your debts in the 1920s they they as I said they instituted an outright ban of bank notes, okay They were outlawed so so not of private bank notes. No private bank could issue bank notes any longer So now if you wanted to carry around bank notes, it would be the Federal Reserve notes So people were totally accustomed to those notes as the dollar they could still demand their gold, but the Propaganda campaign against gold continued during that period And then during during World War one the Fed cut reserve requirements in half meaning banks Did not have to hold around 20% against their Deposits and notes they could now hold around 10% or even less and as a result The money supply doubled from 1913 to 1919 Okay, it wasn't just as a result of that, but also There was a money being lent to banks and so on But we had a doubling of the money supply which caused a huge inflation and then the Fed in 1920 began to Restrain the increase in the money supply and that's what we got the the group was called the depression of 1921 which ended very very quickly because the government did not intervene the central bank did not try to Begin to reinflate the money supply until 1922 when it was already over So how we this to continue with this destruction of the classical gold standard the Fed expanded reserves during the 1920s Both to stabilize prices and to bail out Great Britain Great Britain tried to reestablish itself as a center of finance after World War one and In order to do so they had to reestablish the pound It's parody with gold. Okay. The pounds had depreciated in value It took a lot more pounds to buy an ounce of gold after the war than before the war We say had gone off the gold standard printed a lot of pounds and the price of gold went up So let's say the price of gold went up to seven or eight dollar seven or eight pounds. They wanted to ratio Not seven or eight pounds, but Five dollars So let's say it was about a pound for gold. So let's say it went up to two dollars two pounds per per gold They wanted to to to reduce it. Okay, they wanted to reduce it back to what the price was Before World War one which means that they had to deflate the economy Because their prices were very high price had gone up during World War one and they were very high so The u.s. Help them avoid deflating by raising our own prices So that with our prices going higher now, it would be easier for for great print to export to us and and and to get gold to back up their The pound not only to get gold but to stop the outflow of gold from great Britain to the rest of the world because with Their high prices. No one was buying anything from great Britain. Everybody wanted to sell to them So they had a lot of exports very few imports So we tried to raise price the prices sort of to allow them to return to the gold standard and then We had the Great Depression as a result of this big increase in the money supply which Murray Rothbard estimated at about 7% per year from 1922 from the end of 1921 to through 1928 that was a huge increase in in in The money supply, but what happened was We American economists claim there was no inflation in the United States Irving Fisher who Gary North referred to Dr. North referred to yesterday Said that we have reached an era of perpetual prosperity We will never have another depression because now we know how to Control the prices that is we have stabilized prices. So even though the the That even though we had a tremendous increase in the money supply We had tremendous technological advance and more saving and investment during the 1920s We had refrigeration radios coming in and so on and so there was a plethora of goods that cornucopia of New goods that were coming on to the market and as a result Even though the money supply was increasing its stop prices did not rise prices should have been falling When you had that much economic growth But when the Fed in 1920 we did we did see symptoms of the inflation symptoms of this money growth as We had a real estate boom of course. We had a stock market boom and When the Fed stopped inflating at the end of 1928 We got the usual Sequence of events interest rates shot up businesses saw suddenly they made Bad investments mall investments and they began to cut back on the workforce and we went into recession Okay, and it wasn't helped by the fact that that we had a collapse of the stock market stock market values fell by about 90 percent okay, so Banks began to collapse in 1930 Until 1933 We had a run on the banks As some banks collapsed even the ones that were more stable Began to raise doubts. Okay, people people lost confidence in the bank system as a whole And so they rushed to to to withdraw their their their funds from their savings accounts and and checking accounts and since the banks were fractured reserve banks they couldn't pay off so these savings accounts and Checking accounts many of them disappeared into thin air. Okay, so the money supply shrank tremendously So to prevent this There was a bank holiday declared by President Roosevelt in in March the banks were closed for four or five days and then when the banks were reopened there was Attempt to encourage people to trust the banks again by instituting a federal deposit insurance of Finally a few months later in May The ownership of gold was prohibited and gold was devalued from twenty dollars thirty five dollars So it lost some of its value in terms of dollars Here is the executive order which reads Honor before May 1st all gold coin gold bullion and gold certificates now owned by them to now owned by them To a Federal Reserve Bank branch or agency or to any member bank of the Federal Reserve system Okay, so it's all says all persons are required to deliver. Excuse me honor before May 1st So it was against the law to own gold any longer after May 1st And then It was it had really the law had teeth because it said criminal penalties for violation of executive order $10,000 fines or ten years in prison or both as provided by section nine of this order Okay, so only licensed jewelers and licensed dentists were permitted to own gold or or other Businesses that that acquired licenses for gold And we never got the right back to own gold again until 1975 I think there was a law passed in 74 that allowed Americans to own gold again. I think it went into effect in 75 and You'll see here the statement by FDR in politics nothing happens by accident if it happens you can bet it was planned that way Okay, so it was planted. I mean We're not saying this conspiracy against the gold standard, but the gold standard shackled the government's hands It didn't let them spend Didn't let them spend in excess of of tax revenues and of what they could borrow on on on the free market Okay, so in order to loosen those shackles or to get to destroy those shackles the gold standard was destroyed step-by-step It was there was an attempt. I don't want to Take too much time here because I don't have much time. There was an attempt to restore that After World War two to restore a gold standard because it was chaos after the gold standard had collapsed in the 1930s monetary chaos International investment international trade almost came to an end And there was what was called currency wars where each country would try to print more money and drive the value of its own money down So they could sell more to other countries, but other countries would respond by doing the exact same thing So we had had mass inflation So who are the main architects of the Bretton Woods system, which again is what it was a false? Gold standard Both the British government the US and the British governments okay, and their leading financial Experts were Harry Dexter white and John Maynard Keynes White was the treasury representative Keynes was the representative of the British government White had a name they both more or less wanted eventually a World money or at least a world reserve currency White called it Unita or Unita for United World a bank or For Bank gold okay was Keynes's Word okay, so he wanted that to be Issued as reserves so that all countries could inflate together so that no country lost gold To another country okay, which was the product of the gold standard There was no coordination bank banks would have flayed in one country and gold would flow out to other countries and that That that was a virtue of the gold standard, but since Keynes was in favor of inflation He wanted to replace it Here is Bretton Woods. They met to New Hampshire. They met at this Great grand hotel, okay, and we had a conference up there the Mises Institute had a conference up there a few years ago It's been renovated. It's really beautiful There's Keynes and Harry Dexter white White was later proven was a Soviet spy He was to testify before the House on on American Activities Committee And also all historians left and right now agree that he passed state secret information to the Soviet Union during World War two in fact When the Soviets when Russia opened the archives after the fall of the USSR they found documents that prove that he was a Soviet spy And according to Ben Stahl who wrote a book on the Bretton Woods system White was not a member of the Communist Party But he acted not simply because he believed that the Soviet Union was a vital US ally But because he also believed passionately in the success of the bold Soviet experiment with socialism Well Hitler's experiment was pretty bold, right? But if you were ever to say that I mean, you know your reputation would be immediately Blackened, okay, but people could talk about the bold Soviet experiment in the 30s 40s Okay What was the characteristics of this? Well, I don't want to go through too much. But basically it was based on the US dollar Only the US dollar was convertible into gold at the price of thirty five dollars per ounce But you and I or our grandparents and rather our grandparents and great-grandparents Could not convert their dollars into gold that was only US would only convert dollars into gold for other countries. Okay, other official institutions of Governments and central banks Okay, and I basically say that there. Okay, the other currencies were not backed by gold, but were backed by US dollars And they were all pyramided on on top of US gold stock So now when the Fed created money We didn't have to worry about our balance of payments deficit because we create more dollars prices would go up We buy things from the rest of the world, but they would accept our dollars So we got real goods and services during the late 50s and 1960s in exchange for paper money that was depreciating now initially Everyone trusted the dollar to be as good as gold Okay, by the way, the French economist Jacquesourette called this the deficit without tears Meaning that the US could just go on and have trade deficits with the balance of payments deficits with the rest of the World by just printing up this paper because the rest of the world was willing to accept and Hold the dollars or dollar assets to back up their own money So we created we x what we exported to Europe was inflation what they export to us were real goods and services Okay, let me just show you so basically Europeans paid for the Vietnam War President Johnson said we can have guns and butter we can have consumer goods and we can have military Equipment and weapons and so on and So he instituted Social welfare programs that were very expensive. We were fighting the Vietnam War that was very expensive But taxes didn't go up a lot in the United States Consumer living standards pretty much stayed the same despite these very expensive Programs government programs and that was because we had a massive balance of payments deficit with Europe They were sending us real goods and services. We were sending us paper Why did they accept our paper because initially they thought the US dollar was as good as gold? In 1950 we own more than half the world's gold stock Value to 20 valued at $35 per ounce. We had 25 billion dollars worth Foreign liabilities were only 12 that is foreign governments held about 12 billion dollars. So it was more than a hundred percent a Backing so they weren't worried as we began to have these expensive programs We we began to accumulate all these dollars that we were spending Began to accumulate abroad it went way up so that by 1968 we had 10 million dollars Billion dollars worth of gold and there were 60 billion dollars of foreign liabilities dollar liabilities that we owed gold for and we had to get rid of the gold cover The reserve requirement for the Fed to hold 25% gold behind their Deposits banks deposited money with the Fed also by 1968 they had a release Get rid of the 25% gold cover on the Fed notes They used to be gold wasn't backing the notes You couldn't actually get the gold out, but they were holding 25% of the value of notes in the form of gold In so everything began to collapse What once once foreign countries, especially Switzerland Germany France saw that we had That the US gold stock had run very low We had what we were doing was we were selling gold because the price of gold kept going up over 35 percent Over 35 dollars per ounce in in free gold markets in Zurich and London So the US had to continue to give gold to foreign governments So that they could sell the gold on these markets to keep the price of 35 dollars per ounce finally in 71 Germany left a Bretton Woods system They weren't willing to keep accepting these depreciating dollars and inflating on top of them Switzerland redeemed 50 million dollars in gold in July and France sent an actual naval ship to a New York Harbor to pick up 131 billion million dollars worth of gold That was owed by the US Of course, you know, they didn't really want any any sort of an accident We're a US Coast Guard cutter my bump if they sent a commercial ship my bump the ship and sink it or something like that That's why they sent the warship. That's how trusted the US was at that point. Okay, and this is the French ship It's called the Louis Woonay No, actually, okay, so they weren't fooling around. Okay and Nixon closed the gold window so right after France picked up its gold in early August on August 15th Nixon went on television Slammed the gold window shut reneged on the solemn promise we made to the rest of the world That is our obligation to pay gold out at the rate of 35 dollars per ounce And he says I have directed Secretary Connolly to suspend temporarily, right? The convertibility of the dollar into gold or other reserve assets Except in amounts and conditions determined to be in the interest of the monetary stability and in the best interests of the United States That's just all nonsense. I mean what he's doing is saying we're not paying gold out anymore Because in another two weeks we'd have lost all of the gold that we had so let me stop there That's just to show you after 1971. I'll show you that last diagram. You're 71. Look what happened to the US price level Okay, it was going up Bretton Woods was inflationary Started to go up from 1950 but then after we got Left left the even the false gold standard which was constrained to somewhat the Price level rose tremendously. Thank you very much