August 15th: A Very Important Anniversary

//August 15th: A Very Important Anniversary

In July 1944, with World War II rag­ing on, 730 del­e­gates from all 44 allied nations gath­ered at the Mount Wash­ing­ton Hotel in Bret­ton Woods, New Hamp­shire for the Unit­ed Nations Mon­e­tary and Finan­cial Con­fer­ence. Their pri­ma­ry goal was to rebuild the inter­na­tion­al eco­nom­ic sys­tem through a series of rules, insti­tu­tions, and pro­ce­dures. The del­e­gates spent three weeks delib­er­at­ing upon and even­tu­al­ly sign­ing the Bret­ton Woods Agree­ments.

The Bret­ton Woods sys­tem called for each coun­try to adopt a mon­e­tary pol­i­cy that main­tained the exchange rate by tying its cur­ren­cy to the U.S. dol­lar. If you were a favored bank you could exchange your dol­lars for gold at a fixed rate. This anchored the mon­e­tary sys­tem.

On August 15, 1971(“The Anniver­sary”), the Unit­ed States, under Richard Nixon, uni­lat­er­al­ly ceased con­vert­ibil­i­ty of the dol­lar to gold. This meant that the dol­lar became an all out “fiat cur­ren­cy,” sus­tained by noth­ing but the promise of the fed­er­al gov­ern­ment. Known as the Nixon Shock, this action meant that the Unit­ed States dol­lar would be the sole back­ing of cur­ren­cies and a reserve cur­ren­cy for the world.

Our gov­ern­ment and gov­ern­ments around the world have been on a spend­ing binge. When the cen­tral bank is able to sup­press inter­est rates to zero and when the gov­ern­ment can finance its debts with for­eign cen­tral banks at neg­li­gi­ble inter­est rates—there’s no check on these debts

What about you? Are you on a spend­ing binge? Is your bal­ance sheet “AAA”? Are you in con­trol of your cash flow? Here’s a test: When you go out on Mon­day to cel­e­brate the anniver­sary, will you pay with cash?

Hap­py Anniver­sary!

 

2011-09-30T11:21:30+00:00