Keynes called gold a "barbarous relic". He wanted a currency that avoided being based on gold.
The gold standard was in effect invented by Sir Isaac Newton (1642-1727) who was Master of the Royal Mint in London. He said in 1717 that gold standard was "financial gravity" (he had earlier sorted out some of the problems of gravity in physics).
After all, the Wise Men who brought Jesus gifts 2,000 years ago included gold. That gold could in theory buy the same amount today as then: it has kept its value: financial gravity.
The UK set an example for the rest of the world. But it came off the gold standard in the early 20th century because of World War I and the financial problems the UK encountered.
There was a return of sorts to the gold standard in 1944. The Bretton Woods Conference worked out the post-World War II international financial structure. There was agreement (opposed by Keynes, who was shortly to die) that US$35 would buy a reserve bank one ounce of gold.
The Bretton Woods System gave us an economic miracle. Boomer Australians (born between 1946 and 1966) won the lottery of life. This includes purchasing homes cheaply – and which now makes many older Australians "millionaires" (at least on paper).
But success breeds a disregard for the possibility of failure. The US debased the US$ with the war in Vietnam and other high government expenditures in the 1960s. The US came off the standard in July 1971. Gold is now just another tradeable commodity.
Currencies are now not backed by precious metals: they are "fiat" currency ("I command you to treat this sheet of paper as currency"). Governments can print extra money because the money is not based on any reserve or other benchmark.
Inflation returned. There was far more lending. In 1973 OPEC (Organization of Petroleum Exporting Countries) increased oil prices.
The western world was hit by "stagflation": mixture of stagnation and inflation. There was even speculation that "capitalism is dead" (the Soviet economy was not too healthy either but that was not so obvious at the time). In Australia, the Whitlam Government was besieged with economic turmoil.
And then the inflation was tamed. US Federal Reserve chair Paul Volcker (1927-2019) pushed up interest rates. They reached 20 per cent in June 1981. There was widespread economic dislocation and a dramatic increase in unemployment (all of which helped cost Jimmy Carter his 1980 re-election and put Ronald Reagan in the White House). The new president did not reappoint Volcker given his reputation for toughness!
Additionally, there was China's greatest gift to the world. Post-1979 China was the "factory of the world". It made many very cheap goods to soak up all the credit sloshing around in the global financial system. This too helped keep inflation low.
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