Chapter 2: The Neverending Bank Holiday

On August 6, 1915, His Majesty’s Government issued this appeal: “In view of the importance of strengthening the gold reserves of the country for exchange purposes, the Treasury have instructed the Post Office and all public departments charged with the duty of making cash payments to use notes instead of gold coins whenever possible. The public generally are earnestly requested, in the national interest, to co-operate with the Treasury in this policy by (1) paying in gold to the Post Office and to the Banks; (2) asking for payment of cheques in notes rather than in gold; (3) using notes rather than gold for payment of wages and cash disbursements generally.”

With this obscure and largely forgotten announcement, the Bank of England effectively began the global monetary system’s move away from a gold standard, in which all government and bank obligations were redeemable in physical gold. At the time, gold coins and bars were still widely used worldwide, but they were of limited use for international trade, which necessitated resorting to the clearance mechanisms of international banks. Chief among all banks at the time, the Bank of England’s network spanned the globe, and its pound sterling had, for centuries, acquired the reputation of being as good as gold.

Instead of the predictable and reliable stability naturally provided by gold, the new global monetary standard was built around government rules, hence its name. The Latin word fiat means “let it be done,” and in English, the term has been adopted to mean a formal decree, authorization, or rule. It is an apt term for the current monetary standard, as what distinguishes it most is that it substitutes government dictates for the judgment of the market. Value on fiat’s base layer is not based on a freely traded physical commodity but is instead dictated by authority, which can control its issuance, supply, clearance, and settlement, and even confiscate it at any time it sees fit.

With the move to fiat, peaceful exchange on the market no longer determined the value and choice of money. Instead, it was the victors of world wars and the gyrations of international geopolitics that would dictate the choice and value of the medium that constitutes one half of every market transaction. While the 1915 Bank of England announcement, and others like it at the time, were assumed to be temporary emergency measures necessary to fight the Great War, today, more than a century later, the Bank of England is yet to resume the promised redemption of its notes in gold. Temporary arrangements restricting note convertibility into gold turned into the permanent financial infrastructure of the fiat system that took off over the next century. Never again would the world’s predominant monetary systems be based on currencies fully redeemable in gold.

The above decree might be considered the equivalent of Satoshi Nakamoto’s email to the cryptography mailing list announcing bitcoin. However, unlike Nakamoto, His Majesty’s Government provided no software, white paper, nor any kind of technical specification as to how such a monetary system could be made practical and workable. Unlike the cold precision of Satoshi’s impersonal and dispassionate tone, His Majesty’s Government relied on an appeal to authority and the emotional manipulation of its subjects’ sense of patriotism. Whereas Satoshi was able to launch the bitcoin network in operational form a few months after its initial announcement, it took two world wars, dozens of monetary conferences, multiple financial crises, and three generations of governments, bankers, and economists to ultimately bring about a fully operable implementation of the fiat standard in 1971.

The Bank of England’s troubles started at the dawn of the Great War. On July 31, 1914, large crowds stood outside the doors of its Threadneedle Street headquarters looking to convert their bank balances and banknotes into gold coins before the August bank holiday. The Austro-Hungarian Empire had just declared war against Serbia following the assassination of Archduke Franz Ferdinand and a month of escalating tensions across Europe. All over the continent, investors rushed to convert financial instruments into gold, as they worried governments would devalue currencies to finance war. That fateful July, English newspapers referred to the coming war as the August bank holiday war, expecting it to be a swift victory for the British military. Yet the lines of depositors outside the world’s most important financial institution foretold a different story: the bank holiday that would never end.

Had the Bank of England maintained full cover for its notes and bank accounts in gold, as they would have had to under a strict gold standard, war would not have posed a liquidity problem. All depositors could have had their banknotes and bank accounts redeemed in full in physical gold, and there would have been no need to queue outside the bank. However, the Bank of England had become accustomed to not paying back all its notes with gold. Depositors had good reason to hold money in the form of bank notes and bank accounts rather than in physical gold. Compared to gold, bank notes were easier to carry and convert into either smaller or larger denominations. And an account at an English bank allowed the depositor to make payments by checkbook anywhere in the world far faster than sending physical gold. Global capital sought the Bank’s superior safety and clearance mechanisms, which provided the Bank a solid cushion to diverge away from a strict 100% gold standard.

At the time, the Bank of England was the center of the financial universe, and its pound sterling was recognized worldwide for being as good as gold. The creditworthiness of the British government, its powerful military, and its unrivaled global payments settlement network had given it the supreme position in the global financial order, with around half of global foreign exchange reserves held in sterling.

In the prewar period, the Bank of England had also started to offer its own currency as reserve for the central banks of its colonies under what was known as the gold exchange standard. Since the colonies used the Bank of England to settle their international payments, they were expected to hold onto significant amounts of these reserves and not seek redemption in gold. This allowed the Bank of England a certain inflationary margin, to the point that by 1913, the ratio of official reserves to liabilities to foreign monetary authorities was only 31%. The Bank of England had exported its inflation to its colonies, which left it in a precarious liquidity position. So long as most colonies, depositors, and paper holders did not ask to convert their bank accounts and notes to gold, liquidity would not be a problem.

For a generation of bankers reared on the peace and prosperity of the Victorian era and the gold standard, there was little reason to worry about a liquidity crisis. There was also very little reason to worry about a world war, but both the war and the liquidity crisis materialized in the summer of 1914. While war triggered the Bank’s liquidity troubles, the deeper causes were self-inflicted, and typical of the fiat century: government monopoly over the payment network encouraged abuse of the currency.

As trouble brewed in the continent, many foreign depositors sought to withdraw their assets from England, and many Englishmen preferred to hold gold over the Bank’s paper. In the last six working days of July, the Bank paid out £12.3m in gold coins from its £26.5m total reserves. The previously unthinkable prospect of the Bank of England defaulting on its promise to redeem its notes and accounts in gold suddenly appeared plausible. A devaluation of the pound at that stage would have allowed the Bank’s reserves to be sufficient to back the currency, but would have been unspeakably unpopular with the British public, and permanently undermine their faith in the Bank.

In November 1914, the British government issued the first war bond, aiming to raise £350 million from private investors at an interest rate of 4.1% and a maturity of ten years. Surprisingly, the bond issue was undersubscribed, and the British public purchased less than a third of the targeted sum. To avoid publicizing this failure, the Bank of England granted funds to its chief cashier and his deputy to purchase the bonds under their own names. The Financial Times, ever the bank’s faithful mouthpiece, published an article proclaiming the loan was oversubscribed. John Maynard Keynes worked at the Treasury at the time, and in a secret memo to the bank, he praised them for what he called their “masterly manipulation.” Keynes’s fondness for surreptitious monetary arrangements would go on to inspire thousands of economic textbooks published worldwide. The Bank of England had set the tone for a century of central bank and government collusion behind the public’s back. The Financial Times would only issue a correction 103 years later, when this matter was finally uncovered after some sleuthing in the bank’s archives by some enterprising staff members and published on the bank’s blog.

The Bank of England decided to continue on the gold standard, however, with its dwindling stockpiles, it had to figure out some way to stem the tide of redemptions. Their solution was to declare an unofficial war on gold. The fascinating details of this war can be found in The Bank of England 1914-21 (Unpublished War History), an obscure but highly detailed study commissioned by Bank Governor Montagu Norman, authored by his personal secretary John Osborne, completed in 1926, and unpublished until the Bank uploaded it to its website in September 2019. 

With the public not keen on lending for war, and the bank holding large amounts of government debt instead, the bank needed to shore up its liquidity with more gold. The Treasury issued the appeal quoted at the beginning of the first chapter of this book, asking the public to pay to the post office and banks in gold, take payment in notes rather than in gold, and use notes rather than gold for payment of wages and cash disbursements. After this appeal, the Bank of England and the Treasury instructed banks to collect coins and hold them in reserve at the disposal of the Treasury throughout the war.

“In 1915, the sum of £20,823,000 was collected from the Bankers of the United Kingdom and, in order to furnish the Treasury with further credit, was exported to United States,”

Osbourne wrote. He added in a footnote,

“The Bank kept £2,423,000 sovereigns because their stock was seriously depleted.”

He continued, “In November 1915 it became necessary for the Government to appoint a Committee—London Exchange Committee—to advise on the subject of the Foreign Exchanges. In order to assist the Committee in their operations it was arranged that Bankers should cease to issue gold to their customers, whose requirements could of course be satisfied by Currency Notes.” The custom of committees determining monetary arrangements would become very common in the fiat century.

Osbourne continues:

“During the following year it became evident that as a result of the appeal referred to and the action of the Bankers the public were becoming more accustomed to the use of paper money and more reconciled to the absence of gold.

In order to meet an obligation of the London Exchange Committee in connection with the loan of $50,000,000 made to them by a group of United States Bankers in November 1915, the Clearing Bankers in June 1917 paid to the account of the Treasury the sum of £10,000,000 in gold coin, which was “set aside” on behalf of the Federal Reserve Bank of New York.

A further appeal to the Banks was made in a letter dated the 25th July 1917 from the Chancellor of the Exchequer. Bankers were asked to hold their stocks of gold coins at the disposal of the Government, in view of the existing state or the American exchange. The Chancellor urged the Banks, in the interests of general credit, to hand over their gold by private arrangement and so obviate the necessity for a compulsory order which could be issued under the Defence of the Realm Regulations. As a result of this appeal Bankers throughout the country agreed to hold 90% of their gold at the disposal of the Treasury. 

On the 1st April 1919 the export of gold coin was prohibited by Order in Council end on the same date, at a meeting of Bankers, it was agreed that all gold coin and bullion then held and thereafter acquired by them (excepting only such gold as might be imported by the Banks themselves) should be held at the absolute disposal of the Treasury, and that delivery of it should be made to the Bank of England and when required. Furthermore, it agreed that all gold already earmarked for foreign accounts should, if released, be paid into the Bank of England at once. Details of all holdings of gold were to be furnished to the Bank once a month and the Bankers agreed to discourage by every means in their power withdrawals of gold from the Bank of England.

It was realised that it was absolutely essential both to Bankers generally and to the whole country that the available supplies of gold should be ready at hand, if necessary, for use centrally to meet any threatening developments in foreign exchanges, and particularly in the American exchange. At the end of the year the Treasury requested the Bank to collect the entire stocks of gold coins held by Bankers throughout the Kingdom.”

The Bank would periodically purchase the coins from the banks with bank notes. In December 1919, the Treasury requested the Bank collect all the gold coins held by bankers in the United Kingdom. By June of 1920, private bankers had surrendered £41,793,000 of gold coins, practically all that they had held, and took paper notes instead. The entire operation cost £5,516, at a rate of a little over £1 per £10,000 collected. The discipline of Proof of Work mining was conspicuously absent at fiat’s genesis, and throughout its century. Most of the gold was shipped to the United States in exchange for credit to fight the war.

From the beginning of August 1914 to the end of August 1921, the bank’s net gain totaled £62,411,000 of gold. The British government confiscated 14,684,941 ounces of gold, or around 455.2 metric tons. Today, that gold would be worth around £20 billion, roughly 300 times what it was worth in 1914. At the time of writing in 2021, the Bank of England’s gold reserves stand at only 310.3 metric tons of gold.

The war which caused this demand for gold had also given the Bank a welcome reprieve by suspending most aviation, relieving the bank from shipping gold to its foreign depositors. In April 1919, as the war ended and navigation resumed, the export of gold coins was prohibited.

Economic historian Lawrence Officer summarized this period:

“With the outbreak of war, a run on sterling led Britain to impose extreme exchange control — a postponement of both domestic and international payments — that made the international gold standard non-operational. Convertibility was not legally suspended; but moral suasion, legalistic action, and regulation had the same effect. Gold exports were restricted by extralegal means (and by Trading with the Enemy legislation), with the Bank of England commandeering all gold imports and applying moral suasion to bankers and bullion brokers.”

With less gold in the hands of the people and more notes, the bank had succeeded in protecting the official gold-to-sterling exchange rate of £4.25 per troy ounce of gold, the same price set in 1717 by Master of the Royal Mint, Sir Isaac Newton. The Bank of England’s reliable record in redeeming its notes at this rate for two centuries, interrupted only by the Napoleonic Wars, was a matter of national pride and global renown. It not only gave sterling its legendary reputation of being as good as gold, but also turned the phrase “gold standard” into the proverbial benchmark and paradigm for excellence, predictability, and reliability—a phrase that was never threatened with replacement by a century of the fiat standard.

By using the war to suspend redeemability abroad and discourage it at home, the bank had successfully used its fiat, regulations, and monopoly control over the most important financial infrastructure in the world to finance the war effort without officially coming off the gold standard, announcing a suspension of gold redemption, or devaluing the pound. Thus was born a new science of government-sponsored financial alchemy. By controlling banks and confiscating gold, central banks could create money by fiat. By making the pound as good as gold, the new paper alchemists succeeded where Newton and the old alchemists failed. Gold could be produced at will after all. The printing press and the checking account were the alchemists’ long-sought philosopher’s stone.

In the immediate aftermath of the war, there seemed to be no downside to the world’s central bank and its currency diverging from the sound gold anchor. Over time, the costs of these monetary shenanigans became apparent, as governments would increasingly abuse these schemes, ultimately making them a permanent feature of the fiat century—surreptitiously trading long-term prosperity for the illusion of short-term stability. The economic consequences of the inflation would weigh on the British economy for decades.

Figure 1: The impact of the war on sterling. Source: Inflation: the Vale of the Pound 1750-1998.

By maintaining the pound sterling at the prewar gold rate, the Bank of England sowed the seeds of several problems that became common in later implementations of the fiat standard. The bank maintained the nominal exchange rate between notes and gold, but in reality, the prices of normal goods and services increased sharply. According to recent research by the Economic Policy and Statistics Section of the House of Commons Library, the annual change in prices from 1915–1920 were 12.5%, 18.1%, 25.2%, 22%, and 10.1%, a cumulative five-year rise of 124%. Price increases made life difficult for the average Englishman, spurring the rise of organized labor and popular demands for price and wage controls. Inevitably, rationing and shortages followed, as well as mass unemployment. The war’s end brought millions of military servicemen home, but the price and wage controls made it very difficult for the British economy to accommodate their return to the workforce. Revaluing the pound to accommodate the inflation would have meant devaluing the population’s savings; however, prices of goods and labor would have readjusted on the market. By foregoing this revaluation, maintaining an overvalued exchange rate, and discouraging the redemption of paper into gold, the bank delayed the necessary economic adjustment and prolonged the dislocations brought about by inflation and price and wage controls. Pressure grew on the government to spend to support the unemployed and the poor. However, further spending and expansionary monetary policy caused even more price increases and put greater pressure on sterling in international markets. A populist clamor grew for the bank to bring gold coins back into circulation and return to the prewar gold standard.

Britain’s problems were not just domestic. While all European countries effectively went off the gold standard in 1914, the U.S. had only done so in 1917, attracting large quantities of gold fleeing Europe. With the credit it provided to the Bank of England, the U.S. Federal Reserve also secured a large part of the British supply of gold. As goes gold, so goes power. The Bank of England was learning to readjust to a new global economic reality in which the United States and its Federal Reserve played a supremely important role. The alchemy of the U.K.’s fiat standard continued to become more expensive as the U.S. took on its global leadership role and sterling continued to face troubles throughout the coming century, losing three-quarters of its value against the U.S. dollar, and more than 90% of its value against gold.

All major European economies engaged in large-scale inflation to finance the war, after which their currencies were devalued against gold and were no longer redeemable at the prewar rate. At this point, the prudent step would have been to acknowledge that the fiat standard had served its purpose as a temporary war-financing measure and return to the gold standard. Governments had repeatedly promised this, and Europe’s citizens had expected it. However, returning to the gold standard at the prewar parity would have meant an inevitable end to the inflationary boom started by the credit expansion that financed the war and, subsequently, a painful recession. The U.S. chose this path, resulting in a sharp but quick recession in 1920, after which the U.S. economy began one of its longest expansions in history. U.S. gold redemption resumed in 1922 after a five-year suspension. Britain, on the other hand, tried to square the impossible circle of maintaining the Treasury’s high spending, the union’s high wage requirements, the gold peg at its prewar rate, and sterling’s role as a global reserve currency. Having experienced the sweet taste of paper alchemy, the Bank of England thought it could manage its way out of overt default on its gold redemption obligations through financial and political engineering.

Rather than formalize the reality of inflation and devalue the pound to get back on the gold standard, the Bank of England and the Treasury chose to kick the can down the road and across the pond, where it would continue to be kicked into the next century. So began the habit of obtaining short term relief at the expense of long-term solvency and stability. As economist Murray Rothbard described it:

“In short, Britain insisted on returning to gold at a valuation that was 10–20 percent higher than the going exchange rate, which reflected the results of war and postwar inflation. This meant that British prices would have had to decline by about 10 to 20 percent in order to remain competitive with foreign countries, and to maintain her all-important export business. But no such decline occurred, primarily because unions did not permit wage rates to be lowered. Real-wage rates rose, and chronic largescale unemployment struck Great Britain. Credit was not allowed to contract, as was needed to bring about deflation, as unemployment would have grown even more menacing—an unemployment caused partly by the postwar establishment of government unemployment insurance (which permitted trade unions to hold out against any wage cuts). As a result, Great Britain tended to lose gold. Instead of repealing unemployment insurance, contracting credit, and/or going back to gold at a more realistic parity, Great Britain inflated her money supply to offset the loss of gold and turned to the United States for help. For if the United States government were to inflate American money, Great Britain would no longer lose gold to the United States. In short, the American public was nominated to suffer the burdens of inflation and subsequent collapse in order to maintain the British government and the British trade union movement in the style to which they insisted on becoming accustomed.” 

As Benjamin Strong, chairman of the New York Fed, writes in a letter quoted by Rothbard:

“The burden of this readjustment must fall more largely upon us than upon them [Great Britain]. It will be difficult politically and socially for the British Government and the Bank of England to face a price liquidation in England…in face of the fact that their trade is poor and they have over a million unemployed people receiving government aid.”

Britain sought to ease the pressure on its pound by convincing the U.S. to engage in expansionary monetary policy under the pretext of providing global liquidity. By devaluing the dollar next to gold, the U.S. stopped the drain of gold from Britain to the U.S. and thus reduced the pressure on the pound. To further protect the pound, the Bank of England dumped some of its pound reserves on other countries that needed to use its clearance and settlement mechanisms. Britain and the U.S. arranged the Genoa Conference in 1922 to try to reestablish a global monetary order around their currencies and gold. The conference recommendations included the line, “Gold is the only common standard which all European countries could at present agree to adopt.”

However, returning to the gold standard was very difficult when the Bank of England, still the center of the financial universe, had yet to resume the redemption of its notes into gold. Instead, the U.S. and the U.K. attempted to introduce a gold-exchange standard, modeled on the monetary arrangements that had prevailed in some Asian countries before the war, the abuse of which caused the Bank of England to have a gold shortage at the eve of the war. In essence, global central banks would deposit gold at the Bank of England and U.S. Federal Reserve and use their international settlement network to add salability across space to their gold. This gave the Bank of England and the Federal Reserve significant leeway to go off the gold standard, because other countries’ reliance on these institutions’ financial infrastructure for international trade settlement meant they would rarely attempt to take physical custody of the gold.

As American inflation devalued the U.S. dollar, the U.S. provided loans to Britain, and international central banks acquired large amounts of sterling reserves, it became feasible for the Bank of England to restore some form of gold redemption in 1925. It was not a return to the gold standard, but the introduction of a variation of it: the gold bullion standard. Under this standard, the Bank of England only offered redemption of standard 400-ounce “good delivery” gold bars. Banknotes were no longer redeemable in gold, and the Royal Mint denied the public the ability to purchase its gold. The bank had effectively gone off the gold standard for the majority of the population, and the value of the pound was less tethered to its supposed gold backing than before the war.

While people could no longer redeem their banknotes for gold, they could sell their gold abroad for more than they would have received from the Bank of England. Perversely, by devaluing gold, the bank had subsidized the precious metal’s exit from British shores, as gold always goes where it is valued most. More inflation in the U.S. was needed to prevent more gold from leaving Britain, as detailed in Rothbard’s America’s Great Depression.

That inflation set in motion the familiar business cycle. As inflation subsided in late 1928, the stock market crashed in late 1929, and the boom of the 1920s gave way to the bust of the 1930s. This pattern of bubbles and collapses, the endless cycles of boom and bust, became a regular feature of the fiat standard worldwide, to the point that modern economic textbooks began to treat this phenomenon as if it is an inherent part of a normal market economy, something as normal and inevitable as the seasons.

The depression and the inflation to counter it made the pressure on the pound unbearable. The last pretense of maintaining the prewar gold parity was finally dropped in 1931 as the Bank of England devalued the pound by 25%. One wonders just how different history would have been had it performed this devaluation in 1920, allowing the return to solid gold footing and full gold redemption with stricter limits on inflation.

During the crisis of the 1930s, the U.S. government engaged in fiscal and monetary expansionism to ward off the collapse of its banking system and economy. These policies would not have been sustainable had the dollar continued to be redeemable for gold at $20.67 per troy ounce. In 1934, President Franklin D. Roosevelt ordered the confiscation of Americans’ gold, buying it from the public at $35.00, effectively devaluing the dollar by 43%. Less than two decades after Britain had set the fiat standard by taking hard money from the hands of its citizens and giving them fiat tokens, the U.S. followed suit. Both events were sovereign defaults, though history books rarely call them that.

This was the fiat standard protocol installation, and the whole world copied it: run unsustainable deficits, default by confiscating and restricting the movement of gold, suspend redemption, increase the supply of paper notes, and if you can, try to get other countries to hold your currency as reserve. The U.S. did it best.

The suspension of gold redemption and endless amounts of government-held fiat combined to extend the Great Depression while also giving rise to a bureaucratic monster that lived endlessly off inflation. The flow of gold from Europe to the U.S. continued through the 1930s and 1940s. After the Second World War, the U.S. was in a monetary league of its own, with gold reserves that dwarfed other nations and the world’s most important international payments network. The new monetary reality was enshrined into the architecture of the nascent global financial system in 1946 with the signing of the Bretton Woods Agreement. That agreement returned the world to a gold-exchange standard similar to the one Britain had deployed to its colonies; the same system Britain abused to leave itself in the precarious liquidity position that started this entire sordid history.

The new global monetary system was built around the U.S. dollar, which only other central banks could redeem for gold. The U.S. federal government still prohibited Americans from owning gold, and most other countries imposed restrictions on the metal’s ownership and trade. With all its extra gold, and its ability to export dollars to the rest of the world, there was very little restraint on the capacity of the U.S. government to spend in the postwar years. The military-industrial complex President Dwight D. Eisenhower warned of in his farewell address secured itself a continuous trickle of global war with which to harvest profits from the fiat spigot. FDR’s New Deal welfare programs grew in the 1950s and metastasized in the 1960s under Lyndon B. Johnson’s so-called Great Society—a permanent welfare state that needed to be financed by fiat. The world still bought dollars because they needed them, and there was no reason for Americans to suspect a liquidity problem. But just like England in 1914, the late 1960s placed the U.S. in a gold crunch, as European central banks moved to redeem their increasingly devaluing hoard of U.S. dollars for hard gold.

On August 15, 1971, President Nixon delivered the ‘Nixon shock,’ a series of government edicts aimed at containing rising inflation and unemployment. Nixon said the following in a nationally televised broadcast:

“The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world.

In the past seven years, there has been an average of one international monetary crisis every year. Now who gains from these crises? Not the workingman; not the investor; not the real producers of wealth. The gainers are the international money speculators. Because they thrive on crises, they help to create them.

In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy—and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

Now, what is this action—which is very technical—what does it mean for you? Let me lay to rest the bugaboo of what is called devaluation. If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to stabilize the dollar. Now, this action will not win us any friends among the international money traders. But our primary concern is with the American workers, and with fair competition around the world.”

Nixon’s prognostications and guarantees were off the mark; prices skyrocketed over the coming decades. Instead of stabilizing, the dollar collapsed in value, and the new system of international partial barter, unhinged from its golden anchor, would turn money trading into a lucrative career and a gigantic industry. Even though the U.S. Treasury suspended gold redemption, it committed to maintaining the dollar peg to gold at a certain level. But that sound money mirage only lasted until 1973. It was at that point that the cost of living began to climb, and fast.

In summation, the Bank of England effectively went off the gold standard in 1914 and only returned in 1925 on a gold bullion standard, which it abandoned in 1931. The U.S. abandoned the gold standard in 1917 but restored it in 1922 and abandoned it again in 1934. Britain and the U.S. adopted a gold-exchange standard in 1922 and abandoned it in 1971 to go on a fiat dollar standard. Since 1914, both currencies have lost more than 95% of their value relative to gold. The fiat standard installation process has been a long one, but it has had these hallmarks: gold confiscation, price increases, price controls, central planning, inflationary credit expansion, booms and busts, and the aspiration to export inflation by trying to dump fractionally backed currency on foreign regimes.

The fiat standard was not the design of an engineer. It was instead the central banks’ desperate solution to their looming insolvency, the inevitable geopolitical outcome of a sixty-year-long marriage of politics and money. The history of fiat is the history of government-run financial institutions managing defaults. It was not a technology consciously designed to provide sound money or payment transfers. Central banks the world over would closely follow the prototype set by Britain and the U.S., as they too would default on gold and force the use of their fiat.

The process of implementing this standard, which started in 1914, had been practically completed by 1971. A century after its genesis and a half century after it took on its final operational form, it is now possible to pass judgment on this monetary standard.


Chapter 1
Chapter 3