On August 15, 1971, Richard Nixon announced that the U.S. would no longer exchange dollars held by foreign governments for gold. “Shock waves from Washington’s decision to break the link with gold have rippled down the decades,” reports The Guardian. “The creation of the euro, the hollowing out of US manufacturing, the arrival of cryptocurrencies and the ability of central banks to print seemingly unlimited quantities of money can all be traced back to August 1971.” From the report: In 2019, when he was the governor of the Bank of England, Mark Carney floated the idea of a global digital currency — backed by a number of central banks — as a replacement for the dollar. Carney said his plan would help stabilize financial markets unsettled by trade and currency disputes. Were Carney’s plan ever to come to fruition it would mark the final stage in the shift from a system where currencies were backed by something tangible — gold — to one where they are virtual. It is not hard to see why there are those who feel uneasy about this.
Why? Well, for a start, events of half a century ago led to a rapid increase in currency trading. Foreign exchange markets can be wild and unpredictable places. Governments, as Carney pointed out, try to secure competitive advantage by manipulating their currencies and by protectionist trade policies. One way of doing this is through quantitative easing, the process by which central banks create money though the purchase of bonds. Trillions of dollars, euros, pounds and yen pumped into the global economy over the past decade.
Classical economic theory would suggest that an increase in the money supply of this magnitude should lead to a sharp rise in inflation but that has not happened. At least not yet. Before they became the ultimate speculative play for financial investors, the rationale for cryptocurrencies such as bitcoin was that they represented a hedge against the profligacy of central banks. Tricky Dicky didn’t know it in 1971 but 50 years on his decision has led to a world of volatile financial markets, geopolitical tension, inflated asset prices underwritten by low interest rates and QE, and where trust in central banks is starting to wear a bit thin. In the circumstances, it is perhaps easy to understand why governments have decided to hold on to their remaining gold stocks.
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