4/01/2011 PERMALINK
What caused the financial difficulties that America faces today? I read a blog post this morning wondering exactly what caused the tremendous financial difficulties that America is in today, spending almost $2 for every $1 collected in taxes.

The blog concluded that the wave of deficit spending that began in 1975 caused the current situation to come about. But why did our politicos suddenly lose all their frugality in 1975, causing this plague of deficit spending to break out?

Could it have been Nixon taking the country off the gold standard just a few years before in 1971?

The great advantage of the gold standard is that it does enforce some frugality on politicos. If politicos spend too much and tax too little, either running up debts or printing money to cover the shortfall. Under a gold standard system, foreigners will soon begin redeeming that nations currency for the gold in their central bank's vault. The politicos are then left with a stark choice. Either they get frugal or watch their central bank vault empty out completely, plunging their nation into bankruptcy, and in a democracy, very likely getting them lynched by their constituents.

When France and other nations were doing exactly this to America in the late 1960's and early 1970's. Demanding gold for the excess of dollars they were accumulating. Instead of calling for more frugality from Congress, as would have been the wise move. Nixon, in an act of criminality far exceeding any of his more famous crimes, simply took the world's reserve currency off the gold standard. This act set in motion the wave of ever increasing peace-time deficits that has in recent years brought the nation that issues the world's reserve currency to its knees.

Other nations still have some restraint on their spending without a gold standard. As they must still be able to buy the reserve currency in order to trade with other nations for oil, food and other essential commodities. If their government spends too much, those vital commodities will get really expensive for their citizens to buy, and there will be a backlash against the overspending.

However, when the world's reserve currency nation goes off the gold standard, all external restraints on overspending are completely gone. That nation is left with only the self-discipline and frugality of their politicos to protect them from an eventual financial catastrophe. And this deterrent has proven itself to be vastly weaker than restrain on excessive spending imposed by the gold standard.

Moreover, since other nations will not want their currency to appreciate too much against the world's reserve currency, as this hurts their trade. When the reserve currency is debased, they can be counted on to debase their own currencies to keep that trade disadvantage from happening. This has the unfortunate effect of allowing a reserve currency nation to export to other nations much of the inflation that they have created by printing to much money. This is the effect that is currently causing food prices to rise so quickly in the developing world, that riots and demonstrations have broken out in hundreds of cities. Revolution across the middle east is hitting us now, rather than later, because of this effect.

This ability to export their inflation forcing the citizens of other countries to suffer much of the pain for their overspending makes the temptation for a reserve currency nation to print too much new money all but irresistible. When a reserve currency nation goes off the gold standard and loses its frugality, the overspending, excessive money printing and excessive debt accumulation becomes a worldwide contagion.

When they were all boys, your father, your grandfather and your great grandfather could all buy a Hershey bar at their neighborhood store for around 5 cents. To gage the negative impact of the removal of the restrain imposed by the gold standard on America's politicos. Simply buy a Hershey bar at your neighborhood grocery today. And compare the price to the stable 5 cent price that simple pleasure enjoyed for 100 years before Nixon's 1971 destruction of the only mechanism ever invented for successfully restraining excessive spending by politicos.