What Happened to the “American System” part 2

The banking system of the United States was backed by gold for more than 200 years.  Gold has always been part of the “American System.”  It assured creditors their debts would be repaid in currency that was literally as “good as gold.”  Besides serving as a yardstick for creditors and debtors, gold reserves have also limited the amount of credit available in our economy.  Basin our money on gold limited the amount of new credit banks could create to the size of its reserves.  And this limited the amount of money that could be created inside the system, holding inflation in check.  The gold standard prevented massive credit bubbles from forming because credit creation was linked to the size of the economy vial gold reserves.  Growth in reserves could only be achieved by increases in production or though trade.

A gold backed monetary system doesn’t prevent bankers form making bad loans.  It won’t stop investors from paying too much for bad investments.  And it does not prevent bubbles when debt outside the banking are created without limit.

The ratio of debt to GDP for most of United States history has been around 1.6.  The size of gold reserves limited our debt burdens and those reserves could only grow with the overall economy.

That all changed in August of 1971.  Rather than cut the government’s spending and raise interest rates, President Nixon took us off the gold standard.  From that point on, our creditors had no legal claim to our gold reserves and the banking system had nothing but the Federal Reserve to limit the creation of additional credit and money.

http://www.thefinancialfeed.com/2011/09/what-happened-to-the-%E2%80%9Camerican-system%E2%80%9D-part-2/