Peter Schiff: The Gold Standard Didn’t Fail

The mainstream thinking is the gold standard failed. But as Peter Schiff explained in his podcast, the gold standard didn’t fail. We failed to stay on the gold standard.

The gold standard succeeded so well that the government went off of it.”

One of the features of a gold standard is that it keeps governments honest. It imposes monetary discipline. Many of America’s most influential founders opposed fiat paper money. Thomas Paine wrote, “the “evils of paper money have no end.” Thomas Jefferson described paper money “as the ghost of money.”

The problem with paper money is governments can simply print more of it.

They didn’t want paper money. They didn’t want the government to be able to just print money. They wanted to discipline government. They wanted to create a small government. And they wanted it to stay small, and so they put us on a gold standard.”

The US economy thrived under a gold standard for more than a century. But as politicians wanted to expand the government, they had to devalue the dollar against gold. Franklin D. Roosevelt put the US on the path to a fiat money system in order to pay for the massive expansion in government that went along with his New Deal.

June 5, 1933, marked the beginning of a slow death of the dollar when Congress enacted a joint resolution erasing the right of creditors in the United States to demand payment in gold. The move was the culmination of other actions taken by Roosevelt that year.

In March 1933, the president prohibited banks from paying out or exporting gold, and in April of that same year, Roosevelt signed Executive Order 6102. It was touted as a measure to stop hoarding, but was, in reality, a massive confiscation scheme. The order required private citizens, partnerships, associations and corporations to turn in all but small amounts of gold to the Federal Reserve at an exchange rate of $20.67 per ounce. In 1934, the government’s fixed price for gold was increased to $35 per ounce. This effectively increased the value of gold on the Federal Reserve’s balance sheet by 69%.

The reason behind Roosevelt’s executive order and the congressional joint resolution was to remove constraints on inflating the money supply. The Federal Reserve Act required all Federal Reserve notes have 40% gold backing. But the Fed was low on gold and up against the limit. By increasing its gold stores through the confiscation of private gold holdings, and declaring a higher exchange rate, the Fed could circulate more notes. That meant the government could spend more money.

We had an even bigger expansion of the welfare state with Lyndon Johnson’s Great Society. At the same time, the US was mired in the Vietnam war. All of that spending necessitated an inflationary monetary policy.  With the dollar losing value due to these inflationary policies, foreign governments began to redeem dollars for gold. Gold began to leave the US at an alarming rate.

By the 1970s, it was clear the US couldn’t stay on a gold standard.

Had we stayed on the gold standard, the government would have had to make some very difficult, but good, political decisions. The government was going to have to dramatically cut spending in order to stop the gold drain.”

The US government would have had to raise taxes, cut spending and return to more fiscally responsible police. But Richard Nixon didn’t want to do any of that.

The only way to continue to be reckless and irresponsible was to go off the gold standard.”

And that’s exactly what Nixon did. In August 1971, Nixon ordered Treasury Secretary John Connally to uncouple gold from its fixed $35 price and suspended the ability of foreign banks to directly exchange dollars for gold.

The gold standard doesn’t work for a reckless and irresponsible government that wants more power and wants to deprive its citizens of more of their liberties. But it works great for citizens that want to retain their liberties and restrain the government. So, the problem was we gave up on the gold standard. We allowed Nixon to take us off that standard.”

Peter said it was like the kids at the prom tying up the chaperone and locking him in a closet.

Now they can go have fun and the chaperone can’t do anything about it. So, that was success on the part of the students, but it was a failure on the part of the school, or the parents, or the chaperones, because now the kids are going to run out of control. So, it’s the country’s fault for allowing the government to remove the restraints that the framers of our country had placed upon it by putting the country on a gold standard.”

In this podcast, Peter also talks about the stock market pump on a potential Powell pivot, the Fed trying to prevent its credibility and the market from imploding, and the fact that 2/3 of bitcoin holders are underwater.