“The gold standard did not collapse. Governments abolished it in order to pave the way for inflation.”
– Ludwig von Mises, “The Theory of Money and Credit”
Last Wednesday, when the Fed raised rates, the Labor Department announced that the Consumer Price Index (CPI) had risen 2.7% in the last 12 months – the largest 12-month increase in five years. Later in the same day, the Fed implied that they would not worry overmuch about keeping inflation below their target rate of 2%, which means the Fed will likely keep raising rates, even if we see higher inflation soon.
It was 49 years ago this week, on March 20, 1968, that President Lyndon Baines Johnson signed a bill removing gold backing from the dollar. Three years earlier, he took silver out of most U.S. coinage.
The Consumer Price Index was at 31.6 when silver was taken out of our coins and it was 34.3 when gold backing of the dollar was repealed. Last week, we learned that the Consumer Price Index (CPI) reached 243.6, meaning that prices have risen 671% since silver was taken out of our coinage and 610% since LBJ removed gold backing. More dramatically, gold is up 3,426% since the 1960s, when the price was fixed at $35 per ounce. That means gold has risen more than five times faster than inflation since the 1960s.
The nations of the world have unburdened themselves of gold’s discipline for over 40 years, beginning in March of 1968, when the British devalued the pound to gold. Currencies were completely set free of a gold anchor by early 1973, when they began unloading some of their gold. For 40+ years (1968 to 2009), central banks were net sellers of gold, but once gold pierced $1,000 per ounce for good in late 2009, central banks have been accumulating gold “hand over fist,” totaling over 400 metric tons per year.
It’s no wonder that our founding fathers advocated gold and silver coins in our founding documents. In the Constitution, Article I, Section 10 says, “No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a tender in Payment of Debts.” When Franklin Roosevelt took gold out of our coins in 1934 and Lyndon Johnson took silver out of most of our coins in 1965, this led to an explosion of inflation – as well as oceans of Bills of Credit and Debts for our children and grand-children to contend with. The national debt in 1965 was only $317 billion. Now it’s nearly $20 trillion – 63 times larger.
Debt and inflation follow when gold and silver are taken out of our coins. The gold standard may not return in any meaningful way, but we can create our own gold standard by buying gold.