Bankruptcy of Our Nation (Revised and Expanded). Jerry Robinson

      In summary, the American consumer, the federal government, and the Federal Reserve all benefit from a global demand for U.S. dollars.

      There is an old saying that goes, “He who holds the gold makes the rules.” This statement has never been more true than in the case of America in the post–World War II era. By the end of the war, nearly 80 percent of the world’s gold was sitting in U.S. vaults. And thanks to the Bretton Woods agreement, the U.S. dollar had officially become the world’s undisputed reserve currency and was considered by most nations to be “as good as gold.”

      A study of the United States economy in the post-World War II era demonstrates an era of dramatic economic growth and expansion. The monetary and political leverage gained through the Bretton Woods agreement catapulted the United States to a position of economic supremacy on the global stage. The late 1940s through the early 1960s, commonly known as the Baby Boom generation for its explosive birth rate, gave rise to the one of the most prosperous eras in America’s history.

      Did You Know?

       Until 1965, the only way to earn a living from the United States government was to be elderly or disabled. But under the Great Society program, dependency by American citizens upon government “assistance” reached new heights.

      By the mid-1960s, however, the U.S. economy came under growing economic pressure as Washington began abusing its global reserve currency status through their adoption of a “warfare and welfare” mentality. Under the heavy-handed presidency of Lyndon B. Johnson, a new federal government spending spree began, known as the Great Society program. This big government agenda, promoted to Congress by Johnson in January 1965, sought to provide new federal funding for public education, a so-called war on poverty, urban renewal, conservation, and crime prevention.

      In addition to confronting a whole host of social issues, Johnson created two new government-run systems: Medicare and Medicaid. Medicare provided government-subsidized health insurance for the elderly while Medicaid gave lower income households access to government-sponsored healthcare. With the creation of these two entitlement programs, American citizens could now, for the first time, earn a living from their government.

      While the United States was busy creating a large amount of handouts for its citizens, it was simultaneously waging an undeclared war in Vietnam, at an estimated $5.1 billion per month. By the late 1960s and early 1970s, America had suffered large numbers of casualties. According to most estimates, the Vietnam War had a price tag in excess of $200 billion, which placed a severe strain upon the national economy.

      So how did the United States pay for its growing warfare and welfare state? It simply borrowed the money, also known as deficit spending. As Washington’s deficit spending spiraled out of control, inflationary pressures became a growing threat and the United States was confronted with its first trade deficit of the 20th century.

      An expensive and unpopular war in Vietnam and record government handouts to the American public, funded by outrageous levels of deficit spending, led some nations to rightfully question the economic competence of America. After all, the Bretton Woods system had made the entire global economic order dependent upon a fiscally sound U.S. economy.

      As the economic and political turmoil took its toll on America during the late 1960s, nations who had willingly placed their hopes on a stable U.S. dollar began losing confidence in America’s financial stewardship. This declining faith in America’s willingness to get its fiscal house in order led to massive pressure on the “gold for dollars” system that had been established at Bretton Woods.

      By 1971, as America’s trade deficits increased and domestic spending soared, a growing number of nations who believed that the United States was abusing its leadership role within the global economy began publicly challenging the United States by demanding gold in exchange for their dollar holdings.

      Did You Know?

      Throughout history, gold has been, and will likely remain, the beneficiary of poor fiscal and monetary policies. The death of the Bretton Woods system in 1971 was no different.

      And while America’s growing fiscal recklessness concerned the international economic community, what alarmed them most was the growing imbalance of U.S. gold reserves to its debt levels. Clearly, America had never intended to be the globe’s gold warehouse. Instead, the convertibility of the dollar into gold was meant to generate a global trust in U.S. paper money. Simply knowing that the U.S. dollar could be converted into gold if necessary was good enough for some — but not for everyone. The nations who began to doubt America’s ability to manage their own finances decided to opt for the recognized safety of gold.

      As 1971 progressed, so did foreign demand for U.S. gold. Foreign central banks began cashing in their excess dollars in exchange for gold. As America’s gold reserves declined, dollars came flooding back into the U.S. economy. By the summer of 1971, the U.S. was bleeding gold. Washington realized that the game was over.

      Reader Question

      Q: Could the United States have prevented the breakdown of the Bretton Woods arrangement if it had wanted to? If so, how? (Tom D., Las Vegas, NV)

      A: Good question, Tom. You would think that the large and growing demand by foreign nations for gold instead of dollars would have been a strong indicator to the United States to clean up its act and get its fiscal house in order. Instead, America did exactly the opposite. As Washington continued racking up enormous debts to fund its imperial pursuits and its overconsumption, foreign nations sped up their demand for more U.S. gold and fewer U.S. dollars. Washington was caught in its own trap and was required to supply real money (gold) in return for the inflows of their fake paper money (U.S. dollar). They had been hamstrung by their own imperialistic policies. Washington knew that the system was no longer viable, and certainly not sustainable. But what could they do to stem the crisis? Did they have any options? Yes, but there were really only two options.

      The first option required that Washington immediately reduce its massive spending and dramatically reduce its existing debts. This option could possibly restore confidence in the long-term viability of the U.S. economy. The second option would be to increase the dollar price of gold to accurately reflect the new economic realities. But there was an inherent flaw in both of these options that made them unacceptable to the United States at the time — they both required fiscal restraint and economic responsibility. Then, as now, there was very little appetite for reducing consumption in the name of “sacrifice” or “responsibility.”