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Ever since the Bretton Woods exchange rate system ended in 1971, the world has used exchange rates between most currencies that float freely. After 54 years, we can surely say this has not worked; the dollar price of gold, the truest indicator of real inflation, is approaching 100 times its $35 Bretton Woods price. The theft of Russia’s currency reserves in 2022 also shows that the dollar is an international means of exchange that cannot be relied upon, being controlled by fallible politicians. Absent a vanishingly unlikely outbreak of discipline in the Fed and the world’s other central banks, a Gold Standard is the best viable alternative.

The Bretton Woods system was probably always intended to break down, since its principal designer in 1944 was John Maynard Keynes, who devoutly disbelieved in the link to gold that was its nominal basis. Under Bretton Woods, all currencies were supposed to maintain a link to gold, with a modest “fluctuation margin” (normally of around 1%) and thereby remain in a fixed relationship with each other. There was, however, no restraint on governments by which they must avoid running persistent budget deficits and inflating their currencies. Even more damaging, private gold holding was forbidden in many countries (including the United States) and the link to gold was maintained only by agreement between central banks, who naturally indulged in cheating and backscratching. With no mechanism to restrain governments from inflation and no mechanism to ensure that the gold link was maintained, the Bretton Woods system naturally ended in collapse.

In retrospect, it is surprising that Bretton Woods lasted as long as it did, 27 years from its inception. Probably only the intrinsic favoritism to the United States of its initial exchange rates preserved it, since it prevented Britain and other European countries with devastated industrial bases from devaluing their currencies and thereby recovering their competitiveness. Once Britain and Europe had worked through their inevitable post-war problems, the dollar was intrinsically vulnerable because of sloppy U.S. fiscal and monetary policies. The pointless Vietnam War and the profligate Great Society made matters worse, and collapse came, albeit in 1971 rather than around 1956, when one might have expected it.

The new world that appeared in 1971 was intrinsically even more inflationary than Bretton Woods, though the Keynesian establishment pundits of the time denied this. Instead of an ineffectual check against governments printing money to cover their waste, there was now no check at all. The consequence was the high inflation of the 1970s, caused not by a one-off increase in the Middle Eastern oil price, but by government profligacy, now allowed full rein with no intrinsic check.

Inflation in the United States was only moderate, topping out at around the 10% mark; in Britain, where governments were worse and the Bretton Woods constraints had been more binding, it topped out at an appalling 25% in 1975. Worldwide, real stock market prices sank to around a quarter of their peak mid-1960s values. The gold price spiked, reaching $800 per ounce in January 1980, more than 20 times its Bretton Woods value.

Then Ronald Reagan and Margaret Thatcher arrived, determined to tackle inflation, no matter the short-term political and economic cost. With the help of Paul Volcker in the United States, they forced real interest rates up to a severe level, thereby killing inflation. This resulted in an overvalued dollar, but the 1985 Plaza Accord between the major currency blocs solved that problem.

The problem since then has been that, since Reagan and Thatcher left in 1989 and 1990 respectively, we have had thoroughly sloppy monetary and fiscal policy throughout the world. Even Germany, which after a burst of deficit spending to reunite East and West Germany passed a budgetary limit that restricted deficits, has now, in a moment of madness, abandoned that fiscal control. In addition, central banks throughout the world have become used to printing money to manage their countries’ budget deficits, thereby storing up inflation problems for the future.

With the gold price now 90 times its pre-1971 level, we must ask what this means for future inflation. The US Consumer Price Index, on a basis of 1980-82=100, averaged 40.5 in 1971; in February 2025 it stood at 319.1, up a little less than 8-fold since 1971. Silver, which had averaged around 1/15 the price of gold for the preceding three centuries, averaged $1.60 in 1971, so a gold ounce was worth roughly 22 silver ounces. At today’s prices, however, an ounce of gold is worth 93 ounces of silver, a historically extreme value.

The answer to the question derives from the historically extreme levels of liquidity in global central banks. The Fed’s balance sheet totaled $6.7 trillion in March 2025, around ten times its maximum pre-2008 level because of the “Quantitative Easing” follies of the 2010s. The same is true for the Bank of England, the Bank of Japan and the European Central Bank, while other Asian central banks have historically unprecedented levels of U.S. dollar asset holdings. The mountain of excess liquidity among the world’s central banks suggests only one thing: the relatively modest consumer price increases since 1971 are artificially low, and at some point, the CPI increase will move towards the gold price’s increase, producing a tenfold rise in the prices we actually pay for goods and services.

Apart from increased and very likely worsening inflation, floating exchange rates have other damaging effects on the global economy. Because it is so attractive to speculate in them, for example by carrying out “carry” trades in which a low-interest-rate currency is borrowed and the proceeds invested in a high-rate currency, the financial and speculative flows in the FX market far outweigh the trade flows.

Consequently, trade flows are not very significant in pricing currencies, which can become severely mispriced in trade terms for very lengthy periods, for example the Japanese yen overvaluation that lasted for more than a decade from 2009. The dollar is also structurally overvalued, because trade flows are minor compared with the financial flows into it due to its status as effectively the world’s only reserve currency. With these flows, the Ricardian argument for free trade, which applies only in a world of fixed parities such as the Gold Standard that was being readopted when he wrote in 1817, falls apart completely.

With currencies mispriced for long periods and subject to large random fluctuations, the Ricardian dream of sourcing everything in its most efficient market becomes impossible. Instead, in a floating rate world, tariffs become necessary to correct persistent currency mis-pricings and simply to avoid the “menu-changing” costs of switching production from country to country as currencies fluctuate wildly, with no trade-related reason to do so. They have the additional effect of producing substantial revenue, lowering today’s grossly excessive budget deficits.

Theoretically, we could remove the inflationary element in floating rates by consensus between highly disciplined free-market zealots in charge of all the world economies – a world of Javier Mileis, in which his Argentine miracle could be replicated worldwide. In practice, there is no possibility of more than the occasional such paragon ever emerging, so we cannot run our world affairs on that assumption. Lesser men are inadequate; George W. Bush was elected by the right-wing party in the U.S., yet the U.S. budget deficit exploded under his feeble rule and the U.S. share of world trade collapsed from 31% to 21%.

A nominal “Gold Standard” managed by the inept bureaucrats of the central banks will fail just as surely as did the Bretton Woods system. It will also give countries a vast incentive to cheat; the long-term success of the Polish economy, compared to its competitors, was caused by good policy, but also by the accident of Poland not having joined the euro when the financial crisis of 2008-09 occurred – it was able to stave off deflation by devaluing its currency against its trading partners.

There is only one solution, therefore. One of the world’s major economies, preferably the United States but also possibly China or Japan, must lead the world back onto a true Gold Standard, as Britain’s Lord Liverpool did in 1819. To prevent the game-playing of Bretton Woods, it must be a rock-solid and immovable Gold Standard, with a large volume of gold coins issued, exchangeable as legal tender and required as reserves in the banking system, with private citizens from all countries enabled to hold the gold coins. At today’s gold price of over $3,000 per ounce, such a standard would be in no way deflationary – the value in relation to world output of the gold supply at $3,000 would be a substantial multiple of that in 1971 at $35 or even that of 1914 at £4.25 per ounce of pure gold. A standard of silver or some other rare indestructible metal would also be possible, but why mess with success? (Silver might be an option for a China- or Japan-based Silver Standard, since that is their tradition.)

The Gold Standard would give the country adopting it all the benefits of a reserve currency, and as with 19th century Britain, in the longer term it would drive all the world’s banking business to its shores.

Now that would Make America unarguably Great Again!

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