Aug. 15, 2011, marked the 40th anniversary of the U.S. default on the dollar’s convertibility into gold. It was the last of the world’s currencies to be backed by gold, and thus began an experiment with a reserve fiat currency that was doomed to failure before it began. Without exception, all paper currencies have ended in hyperinflation followed by complete devaluation and eventually ceased to exist. Aug. 15, 1971, was just like any other day for most people, and President Nixon’s unprecedented decision to cut the U.S. dollar’s gold convertibility was largely ignored by the public. The majority of citizens didn’t understand the implications for their financial future. Contrast that to today, where a historic downgrade of U.S. debt and a very public $2-trillion increase of the debt ceiling dominated headlines and the television news.
The U.S. dollar is the world’s reserve currency despite the fact that it is being issued by the world’s largest debtor nation. Investors around the world flee to it during times of crisis, despite it continually losing value through debasement. Gold meanwhile is dismissed as a viable asset, ignored by most pensions, institutions and asset managers despite increasing from $35 in 1971 to over $1,800 at the end of August.
It is important to note that on that historic day 40 years ago, the dollar quietly ceased to be money and instantly became a currency. While fiat currencies function well as a medium of exchange and a unit of account, they fail miserably as a store of value. The current monetary system, which began in 1971, has two critical features that have profound implications for our financial future:
1. Fiat currency is created out of debt via the banking system and the Federal Reserve.
2. The amount of currency created must continually expand.