The End of the Gold Standard and the Explosion of Federal Debt

The End of the Gold Standard and the Explosion of Federal Debt

2021 marks the 50th anniversary of the U.S. dollar going off the gold standard. This is a timely if sordid occasion. In response to the crisis, last year saw the Federal Reserve issue an unprecedented multi-trillion dollar stimulus in what seems to be a precursor of things to come. The influx of free-floating money has brought on inflationary concerns ranging from those depicting a late 1970s scenario all the way to a Weimar worst-case.

The separation of gold from the dollar in 1971 did much for both in the decades to come. The loss of the dollar’s purchasing power was expedited in force, and governments learned that they could respond to any crisis or even need by simply printing more money. Officials were also far less compelled to think about the consequences of government spending, and the comparison of federal debt now versus 70 years ago shows exactly that.

Federal debt growth over the last 60 years

In 1960, the federal debt amounted to just over half the size of the U.S. economy. Today, it sits at 130% of the U.S. economy, paired with a $28 trillion national debt figure that seemed unfathomable decades prior. The rise of the Modern Monetary Theory (MMT) shows just how unfathomable the debt is, along with any solution to it. Proponents of MMT say that governments should freely print more money whenever needed, and in many ways, it’s difficult to argue that MMT hasn’t already been implemented.

The M1 money supply, or the amount of currently available liquidity, rose in December by a record 67% year-on-year. And with plans for a $1.9 trillion stimulus package to be issued in the short-term, the path to inflation appears to be unavoidable.

Gold as a store of value

Gold’s tale is one of sharp contrast. The metal became available for purchase and trading in the U.S. in 1974, and by 1980, an ounce of gold was worth $850, representing a 385% increase. Many are quick to point out that this was a high inflation period for the U.S., yet gold’s value over the coming years and decades continued to grow exponentially whereas the dollar eroded.

Today’s gold price of above $1,800 attests to that, as the metal has posted a compound annual growth rate (CAGR) of about 8%. Its scarcity, liquidity, popularity and unquestionable value have made the 50-year anniversary a particularly notable one. At no point over the past 50 years were calls for a return to the gold standard louder, as it becomes clear that faith and reassurances won’t be enough to back the dollar for much longer.

How much longer can record debt last?

Whether the Federal Reserve and the Treasury Department are considering any sort of return to money backed by gold is a matter of hot debate. The enormous difficulty of returning to the gold standard stems from, and highlights, the sheer amount of money that has been printed in the meantime.

With official gold reserves at around 261 million ounces or $493 billion, the government would need to fix the price of an ounce of gold to about $100,000 to keep the economy afloat. However implausible a return to the gold standard might seem, Americans who own gold can get just as much reassurance in their investment from the inflationary policies of MMT.

In a clear example of cause and effect, each newly-printed U.S. dollar bill makes gold more valuable and the greenback less valuable. Gold’s value increases most visibly when compared to the decreasing value of the dollar.

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