The Mystery of Banking

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The Mystery of Banking
2
Rothbard, “New Deal,” p. 52.
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authorities. The United States soon became the most inflationist
of the major powers. Hard money countries, such as West Ger-
many, France, and Switzerland, increasingly balked at accepting
the importation of dollar inflation, and began to accelerate their
demands for redemption in gold. Gold increasingly flowed out of
the United States and into the coffers of foreign central banks. 
As the dollar became more and more inflated, especially rela-
tive to the newly sounder currencies of Western Europe, the free
gold markets began to doubt the ability of the United States to
maintain the cornerstone of the Bretton Woods system: redeema-
bility of the dollar into gold (to foreign central banks) at $35 an
ounce. To keep the gold price down to $35, the Treasury began
to find it necessary in the 1960s to sell more and more gold for
dollars in the free gold markets of London and Zurich. In this
way, private citizens of European and other countries (U.S. citi-
zens were not allowed to own any gold) were able to obtain a
kind of redeemability for their dollars at $35 an ounce of gold. As
continuing inflationary policies of the United States accelerated
the hemorrhaging of gold on the London and Zurich markets, the
United States began the unraveling of the Bretton Woods system
by installing the two-tier gold system of 1968. The idea was that
the United States was no longer committed to support the dollar
in the free gold markets or to maintain the price at $35 an ounce.
A bifurcated gold market was to be constructed: The free market
would be left strictly alone by the central banks of the world, and
the central banks pledged themselves never to have anything to
do with the free gold markets and to continue to settle their
mutual foreign balances at $35 an ounce. 
The two-tier system only succeeded in buying a little time for
the Bretton Woods system. American inflation and gold outflow
proceeded apace, despite the pleas of the U.S. that foreign central
banks abstain from redeeming their dollars in gold. Pressure to
redeem by European central banks led President Nixon, on
August 15, 1971, to end Bretton Woods completely and to go off
the gold standard internationally and adopt a pure fiat standard.
The short-lived and futile Smithsonian Agreement of December
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252
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1971 tried to retain fixed exchange rates but without any gold
standard—an effort doomed to inevitable failure, which came in
March 1973.
3
Thus, President Nixon in effect declared national bankruptcy
and completed the failure to honor commitments to redeem in
gold initiated by Franklin Roosevelt in 1933. In the meanwhile,
Congress had progressively removed every statutory restriction
on the Fed’s expansion of reserves and printing of money. Since
1971, therefore, the U.S. government and the Fed have had
unlimited and unchecked power to inflate; is it any wonder that
these years have seen the greatest sustained inflationary surge in
U.S. history? 
2. T
HE
P
RESENT
M
ONEY
S
UPPLY
In considering the present monetary situation, the observer is
struck with a phenomenon we mentioned at the beginning of this
work: the bewildering series of Ms: Which of them 
is
the money
supply? The various Ms have been changing with disconcerting
rapidity, as economists and monetary authorities express their
confusion over 
what
the Fed is supposed to be controlling. In par-
ticularly shaky shape are the Friedmanite monetarists, whose
entire program consists of ordering the Fed to increase the money
supply at a steady, fixed rate. But 
which
M is the Fed supposed to
watch?
4
The puzzle for the Friedmanites is aggravated by their
3
For a brief summary of the progressive breakdown of world currencies
from the classical gold standard to the end of the Smithsonian agreement,
see Murray N. Rothbard,