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Greeks follow U.S. path

While there may be some who have hopes that Greece’s debt problems may be resolved without a financial crisis, the long-term prospects are virtually nil. A review of U.S. monetary policy from 1944 to 1980 demonstrates just how difficult it will be to avoid an economic collapse, either in Greece, across the Eurozone, or possibly even globally.


Greece's debt problems are likely to cause a financial crisis.

Coming out of the 1944 Bretton Woods agreement and the end of World War II, the United States had the world’s strongest economy and political clout. As such, a gold exchange system was set up. Under this system, the U.S. dollar would be kept at a hard peg against gold ($35 per troy ounce). Other nations could then fix their currency against that of the U.S. dollar. Should any other nation receive an excess of U.S. dollars, it could turn them back over to the U.S. Treasury and receive gold in exchange. The potential risk of being forced to exchange gold reserves for U.S. dollars was, theoretically, a sufficient discipline to pressure the U.S. government to maintain a stable value of the dollar.

This system worked well for a number of years. By the early 1960s, however, the U.S. government began to abuse its “exorbitant privilege” by incurring more and more debt in U.S. dollars. Federal budget deficits soared with the costs of the war in Vietnam and the new war on poverty. The U.S. government borrowed so much, in fact, that it exceeded the amount that the world wanted to absorb.

The West German government, in particular, experienced upward pressure on its currency, the mark. It resisted turning in dollars to get gold. However, other countries such as France and the Netherlands challenged the Johnson administration to continue to honor its commitment to exchange gold for repatriated dollars. In theory, this demand for gold should have imposed monetary and fiscal discipline on the U.S. government. In reality it did not.

Instead of curtailing the excess issues of U.S. dollar debt, the Johnson administration imposed capital controls, taxed foreign travel by Americans and subsidized exports as ways to absorb the excess dollars outside of U.S. borders.

Then the London gold pool, established by governments to suppress the price of gold, collapsed. This led in 1968 to the U.S. government ending the gold backing of Federal Reserve Notes (the predominant form of outstanding U.S. currency) and to using its political clout to pressure most other nations into not redeem United States Notes and Silver Certificates for gold.

In the last year of Johnson’s presidency, a 10 percent surtax on personal and business incomes was imposed. When the West German government revalued the mark, a temporary stability was achieved.

Still, the U.S. government would not adopt prudent monetary policy. A mild recession in the United States led the government to adopt a loose policy. As 1971 began, the world was again flooded with excess U.S. dollars. By mid-1971, U.S. policy makers faced a dilemma. They could 1) continue with a highly expansionary monetary and fiscal policy, continue to lose gold reserves, and accelerate increases in consumer prices, or 2) cut back on monetary expansion and put the nation back into a recession in the months leading up to the 1972 elections.

American politicians did neither. Instead, on Aug. 15, 1971, President Nixon “temporarily” closed the gold-exchange window (which has been closed continuously for the past 44 years). They also floated the value of the U.S. dollar and imposed wage and price controls on the populace. The impact of the inflation of the money supply did not lead to significant consumer price increases until after the 1972 elections (how convenient for the incumbents, heh). The Bretton Woods agreement collapsed and the U.S. suffered a worse recession.

The U.S. government did not learn to practice monetary and fiscal restraint. During President Carter’s administration, foreign governments and central banks finally forced the U.S. government to borrow money denominated in West German marks and Swiss francs (these were called “Carter Bonds”). This fiscal restraint resulted in lower federal budget deficits, lower increases in consumer prices and rapid economic growth during the Reagan administration.

If a nation like the United States, with the greatest economic and political power after World War II and a currency initially convertible into gold, was unable to practice monetary and fiscal self-restraint, why should this be expected of the Greek or any other government? So, why should anyone expect a good result out of the current Greek financial crisis?

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at Other commentaries are available at Coin Week ( He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” ( His Numismatic Literary Guild award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m.Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at

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