In July 1944, delegates from 44 nations met at Bretton Woods, New Hampshire – the United Nations Monetary and Financial Conference - and agreed to “peg” their currencies to the US dollar, the only currency strong enough to meet the rising demands for international currency transactions.
Member nations were required to establish a parity of their national currencies in terms of the US dollar, the "peg", and to maintain exchange rates within plus or minus 1% percent of parity, the "band."
What made the dollar so attractive to use as an international currency was each US dollar was based on 1/35th of an ounce of gold, and the gold was to be held in the US Treasury. The value of gold being fixed by law at 35 US dollars an ounce made the value of each dollar very stable.
The US dollar, at the time, was considered better then gold for many reasons:
- The strength of the US economy
- The fixed relationship of the dollar to gold at $35 an ounce
- The commitment of the US government to convert dollars into gold at that price
- The dollar earned interest
- The dollar was more flexible than gold
There’s a lesson not learned that reverberates throughout monetary history; when government, any government, comes under financial pressure they cannot resist printing money and debasing their currency to pay for debts.
Lets fast forward a few decades…
The Vietnam War was going to cost the US $500 billion. The stark reality was the US simply could not print enough money to cover its war costs, it’s gold reserve had only $30 billion, most of its reserve was already backing existing US dollars, and the government refused to raise taxes.
In the 1960s President Lyndon B. Johnson's administration declared war on poverty and put in place its Great Society programs:
- Head Start
- Job Corps
- Food stamps
- Funded education
- Job training
- Direct food assistance
- Direct medical assistance
More than four million new recipients signed up for welfare.
During the Nixon administration welfare programs underwent major expansions. States were required to provide food stamps. Supplemental Security Income (SSI) consolidated aid for aged, blind, and disabled persons. The Earned Income Credit provided the working poor with direct cash assistance in the form of tax credits and welfare rolls kept growing.
“The problem with Socialism is that eventually you run out of other people's money.” Margaret Thatcher
Bretton Woods collapsed in 1971 when Nixon severed (known as the Nixon Shock because the decision was made without consulting the other signatories of Bretton Woods, even his own State Department wasn’t consulted or forewarned) the link between the dollar and gold – the US dollar was now a fully floating fiat currency and the government had no problem printing more money.