Between Dow Jones And Six Million Dollar Man 1

Through the gold standard, any country holding US currency could exchange dollars at "The Gold Window" for physical gold at the rate of $35 per ounce. Following Bretton Woods, this system worked well for many years, with the US Government generally exhibiting responsible currency management. Spending was within budget and borrowing was limited. Money supply grew in size, but only at the same rate as the underlying GDP growth rate.

However, with the escalation of the Vietnam War in the 1960s, spending on the military soared and the Government went deeply into debt. To finance the war, money had to be borrowed, and thus the supply of US money in global circulation increased significantly. Countries holding large reserves of US dollars began converting them into physical gold.

This led to a large outflow of gold reserves from the US to countries such as France, which was cashing in its excess dollars at the Gold Window at a frantic rate. The system began to buckle, as the physical gold transfers accelerated.

Alarmed at the rapid dissipation of US gold reserves and frustrated by not being able to effectively fund the Vietnam War, Nixon took the dollar off the gold standard in 1971. This freed the dollar from a tangible anchor and allowed massive borrowing and debt expansion. Money supply within the system skyrocketed.

Inflation rose sharply during the 1970s, driven by spiraling wages and commodity prices. Oil peaked at $40 a barrel in 1980. Gold hit $850 an ounce. On the front pages of newspapers there was talk of the US dollar potentially collapsing.