Closing the gold window, 1971

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    I hear that the gold window was closed as a result of the US not being able to honor all redemption requests as a result, I suppose, of printing too much money? This supposedly also has something to do with the government spending too much money on the Vietnam war and Great Society? Can someone explain this? I suppose that if the government were printing money to finance its spending that would make sense, but wasn’t the money just borrowed? If it wasn’t borrowed, then who created the new money? I suppose the Fed? How so? Did it just buy government bonds with money it didn’t have? How does that work?

    #18249
    jmherbener
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    Under the Bretton-Woods international monetary system (1944-1971), the dollar was redeemable by foreign central banks at the rate of $35 an ounce. As the Fed generated monetary inflation, the redemption became more tenuous. By the mid-1960s, the dollar was devaluing against other currencies and gold. Led by the French, the redemption claims became more intense after 1968 and then Nixon rescinded redemption in August 1971.

    Take a look at the last chapter of Murray Rothbard’s book, A History of Money and Banking in the United States:

    http://mises.org/books/historyofmoney.pdf

    For an explanation of how the Fed generates monetary inflation and credit expansion, consult Rothbard’s book, the Mystery of Banking:

    http://mises.org/Books/mysteryofbanking.pdf

    In short, the Fed generates monetary inflation and credit expansion by purchasing securities from banks with newly issued money. The banks use the newly-issued money as reserves against the checking account balances of their customers, With more reserves, the banks then can issue more checking account balances by making loans to their customers. Fro example if banks hold a 10% reserve of cash against their checkable deposits, then each $1 in new reserves can support $10 in new checking account balances.

    Here are the data for the money stock measure called M1 which is roughly cash plus checkable deposits:

    http://research.stlouisfed.org/fred2/categories/25

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