Unleashed: The monetary order since the end of the gold standard

50 years of moving away from the gold standard: Senior Economist Johannes Oehri (LGT Capital Partners) reviews monetary policy and looks ahead.

Johannes Oehri, Senior Economist (LGT Capital Partners)
6 minutes
Bank locker
Bretton Woods Conference 1944.
Bretton Woods Conference: "a weakened version of the gold standard". © KEYSTONE / Everett Collection

It is true that most currencies broke with the actual gold stan­dard as early as the First World War. However, the post-war monetary order established at the Bretton Woods conference in 1944 once again led to a weakened version of the gold standard.

The U.S. dollar served as a global anchor currency, which was to be exchanged in gold at any time at a fixed rate of 35 USD per troy ounce, while all other currencies were pegged to the dollar at a fixed exchange rate and thus still indirectly to gold.

From then on, the world relied on the Americans' promise to fully exchange all dollars for physical gold on demand, at any time. But the system soon began to encounter difficulties.

Nixon buries gold standard in front of running TV cameras

To finance the horrendous war expen­ditures and President Johnson's elaborate "Great Society" social program, the treasury turned to the printing press (note the parallels to today), which increasingly diminished the purchasing power of the greenback. Foreign central banks had to buy up the rapidly growing dollar supply to stabilize their exchange rates. Their accumulated dollar holdings soon exceeded the gold reserves at Fort Knox, which is why the US had long been unable to keep its redemption promise.

President Nixon ends redemption promise of gold in 1971.
President Nixon ends redemption promise of gold in 1971. © KEYSTONE / AP Photo/Charles Tasnadi.

The gold reserves melted away, threatening insolvency. On Sunday evening, August 15, 1971, President Nixon pulled the emergency brake and announced on television that he was ending the gold standard, contrary to the contractual agree­ment. It was the nail in the coffin for gold money, the biggest gold heist, indeed the biggest act of monetary expropriation in history.

The scene of the Bretton Woods Conference: Mount Washington Hotel.
The scene of the Bretton Woods Conference: Mount Washington Hotel. © Art Phaneuf / Alamy.

Consequently, the last link between money and the yellow precious metal was broken. Henceforth, trust in state institu­tions was to suffice to give money a value. Thus, all currencies became irredeemable paper money that could be multiplied unhindered and seemingly without limits. For many years, a certain degree of restraint was exercised.

But since the financial crisis at the latest, reaching into the monetary poison cabinet has become routine. Bankrupt banks and deficient budgets were financed for years with newly created money. The pur­chase of government debt, once considered an extraordinary measure, has long since become part of the standard repertoire of monetary policy.

Finance ministers become central bankers - and vice versa

Hardly anyone seems to mind anymore that the boundaries between fiscal and monetary policy are becoming increasingly blurred. In Europe, former finance ministers are becoming central bankers, in the US vice versa.

Central banks are increas­ingly degenerating into mere vicarious agents of extravagantly spending governments, which means that there are virtually no longer any limits to the financing of governments' spending desires. Joe Biden's "American Family Plan," for example, is set to become the biggest social program since Johnson’s aforementioned "Great Society". And there is no change of direction in sight.

Johannes Oehri (LGT)
Johannes Oehri (LGT): "Growing cracks in the social fabric are calling for more fiscal spackle."

The growing cracks in the social fabric are calling for more and more fiscal spackle, and the central banks are ensuring that it can be financed. It goes without saying that the institutionalized independence of the monetary watch­dogs will de facto be jeopardized if they permanently become the most important buyers of government debt. But monetary policy is becoming increasingly politicized anyway.

Central banks are supposed to take care of social inequality, affordable housing, and climate change - for which they have neither democratic legitimacy nor competence - instead of focusing on their softened price stability targets. Secretly, one wishes for somewhat higher inflation rates anyway, because negative real interest rates are the only seemingly proven means of creeping devaluation of horrendous debt.

The more the fiat money system is exhausted, however, the stronger the corrective forces of the markets, which are pushing for a clearing of pent-up undesirable developments, will have to be kept in check by repressive state interventions, via regulations and bans.

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Cryptocurrencies will not ultimately pro­vide any real competition for the existing reserve currencies.
Cryptocurrencies will not ultimately pro­vide any real competition for the existing reserve currencies.

This raises the question of why we have not seen a widespread loss of confidence in state institutions and their currencies so far. It is probably mainly the lack of alternatives that keeps savers from fleeing from these currencies. After all, none of the major currencies is free of symptoms of creeping stability erosion. And private cryptocurrencies will not ultimately pro­vide any real competition for the existing reserve currencies - simply because they are not allowed to. Their widespread use would undermine the state's monetary monopoly and thus deprive authorities of their cherished money creation profits. Decentralized, uncontrolled, private digital currencies with anonymized transactions are precisely not in the interest of the Leviathan. Their possession and use will therefore sooner or later be restricted, taxed, or banned altogether.

From gold standard to digital asset

But not even money can resist digitalization. Most central banks will therefore introduce a first generation of digital central bank currencies before the end of this decade, with the aim of maintaining monetary sovereignty, the effectiveness of their monetary policy and ultimately their own relevance in the digital age.

After money finally broke free from its golden shackles 50 years ago, paper money will soon shed its physical dress as well. However, there can be no talk of a new monetary order. The transition from paper to digital money will be carried out extremely carefully so as not to undermine the existing financial architecture.

Fed chief Yellen, ECB & Co. - vicarious agents of big-spending governments.
Fed chief Yellen, ECB & Co. - vicarious agents of big-spending governments. © KEYSTONE/DPA/Kevin Dietsch

But digital cash has other advantages from governments' point of view. Transactions will hardly ever be as anonymous as with paper money, and its programmable nature could open up entirely new possibilities - such as the enforcement of negative interest rates or automatic tax collection - and open the door to abuse. So it is surely no coincidence that the authoritarian regime in China, of all places, is particularly fond of digital central bank currency.

And even if the Fed, ECB & co. deny corresponding intentions, monetary history shows: It would be naive to assume that the state will not also consider these new possibilities sooner or later to finance its expenditures and to tame market forces - lucky who could exchange his 35 paper dollars for a fine ounce of gold back then: These roughly 31 grams of ultimate hard currency cost 1800 USD today.