gold; the United States got its preferred hard money currency. The Bret-
ton Woods Agreement and U.S. economic might after WWII gave the
United States and the U.S. dollar undisputed dominance.
The system would work perfectly as long as the Federal Reserve Board
of the United States enforced sound monetary operations by stopping the
printing of dollars when people showed up with dollars demanding gold.
The U.S. monetary and Federal Reserve authorities naturally would not be
able to accommodate a huge run on U.S. gold; however, if such a circum-
stance was handled promptly and wisely, and if the U.S. authorities could
convince the world of the United States’ sound policies, then a crisis could
be averted. The world economy would always have precisely the right
amount of money.
In 1953, when President Eisenhower tried to boost the U.S. economy
out of recession, instead of cutting tax rates, he leaned on the Fed to print
dollars. Because all currencies were fixed together, the surplus flowed
around the world. The printed dollars reduced the U.S. gold reserve by the
same amount.
The system did break down. To run a dollar standard, the United States
certainly did not need $24 billion in gold bullion, for the value of gold is not
as a medium of exchange, which requires tonnage, but merely as an error
signal to alert administrators when too many dollars are being printed. By
1965, the United States had depleted Fort Knox of approximately $12 bil-
lion of its gold tonnage, mainly to the Europeans and, in particular, France.
A media story of the time reported that the weight of the gold accumulating
on the second floor of the London Metal Exchange building was so heavy
that the floor gave way.
In the spring of 1971, as the Fed tried desperately to expand the U.S.
economy by flooding it with dollars, the rest of the world came demanding
gold. On August 15, 1971, President Richard Nixon ordered the gold win-
dow closed, ending the international currency’s link to gold.
An attempt to rebuild Bretton Woods around gold at $38 per ounce
instead of $35 was made with the Smithsonian Agreement. Later, the
gold-dollar window was shut permanently, and what Keynes suggested in
1944 became a reality. Economists around the world projected a dra-
matic increase in the price of oil and other commodities; another interest-
ing twist in the accepted folklore that claims that oil prices increased
because of the 1973 Arab-Israeli War. It is important to note that infla-
tion of the 1970s was not caused by the Organization of the Petroleum
Exporting Countries (OPEC) but rather was caused by the breakdown of
Bretton Woods. No country could escape the impact of inflation. Com-
modity prices skyrocketed between 1966 and the spring of 1974. Here
aresomeexamples:
Money and Its Creation 97