After the gold standard, we got bigger government and a smaller dollar

August marks the 50th anniversary of Richard Nixon’s infamous decision to “close the gold window,” reneging on the U.S. government’s pledge to redeem dollars for gold. Although Nixon’s action spelled the end of the postwar Bretton Woods framework, the system in place circa 1970 was a pale shadow of the original gold standard. 

To realize just how much governments have transformed their role in the people’s money, it is useful to explain how the system originally worked.

From the founding of the constitutional Republic through the eve of the Civil War in 1861, the federal government didn’t issue any legal-tender paper currency at all. Rather, for the official money, the federal government produced gold and silver coins stamped with various dollar denominations.

This is a critical distinction between the old and new ways: under Bretton Woods, the government “pegged” the dollar to gold (at $35 per ounce). U.S. authorities decided how many dollars they were going to print, and if they were too aggressive, then other central banks could turn in their dollars and eventually drain American vaults of the yellow metal. But before the Civil War, government officials weren’t in charge of picking the quantity of dollars at all. Rather, the public determined how many dollars were in circulation by presenting gold or silver to the government for minting as coins according to weights specified in law.

In other words, rather than peg the dollar to gold (or silver), the earlier authorities defined it as a specific weight of the precious metals. Just as a commonly understood meaning of “feet” and “bushels” was required for the enforcement of contracts, so too was the meaning of “dollar” required.

During the Civil War the Union famously issued “greenbacks” — green currency notes not redeemable in coin — while the Confederacy engaged in even more reckless inflation. By 1879, the federal government restored the convertibility of paper dollars to gold (at approximately $20.67 per troy ounce), while silver had been demonetized.

From 1879 until the outbreak of the World War in 1914, the United States was a participant in what has been called the classical gold standard, under which all world powers redeemed their sovereign currencies in a definite weight of gold. Yet note that there had already been a significant weakening of the “hardness” of American money: rather than walking around with gold and silver coins in their pockets, Americans were now in the habit of holding green pieces of paper called “U.S. dollars,” which could be redeemed for gold.

Another major blow occurred in April 1933, when newly inaugurated Franklin D. Roosevelt confiscated the nation’s monetary gold under threat of prison and a $10,000 fine. By 1934 the dollar had been “revalued” at $35 per ounce — implying a 41 percent devaluation — and it was illegal for Americans to even write contracts using the world price of gold as a basis for calculating the dollar payment.

As the Allied victory became clear in World War II in 1944, representatives from the major powers hammered out a postwar monetary framework at a posh hotel in Bretton Woods,…