August 15, 2011 is the 40th year anniversary of President Nixon cutting the last linkage of the dollar to gold. Before that famous date, foreigners could take their accumulated dollars to the U.S. Treasury’s Gold Window and exchange them for gold at the price of $35.00 ounce. This arrangement was set-up at the Bretton Woods conference in July, 1944.
After August 15, 1971, the dollar was a free floating currency—it was a true fiat currency. The only backing it had was the full faith and credit of the U.S. Government. In essence it had the full faith and backing of U.S. politicians. They can and did issue as many dollars as they wished to finance an expanding social welfare agenda. Gold anchored the dollar to the earth. It imposed discipline on the fickle whims of politicians to spend money for whatever reason.
What was the result? A dollar that was worth 100 cents to the dollar in purchasing power in 1971 is worth only 18 cents in purchasing power today. If this continues, standards of living (especially for the middle class) will continue to decline. No nation in history can remain a great economic and military powerhouse with a currency that is unstable and declining in value. Eventually, we will have to return to some type of commodity backing to the dollar. When we do, the result will be deflationary.