Special to Financial Post | Oct 21, 2011
By Jason Heath
In 1971, Richard Nixon unilaterally ended the direct conversion of U.S. dollars to gold bullion. This gave more flexibility to the world’s largest economy to expand the supply of U.S. dollars and therefore, U.S. debt, meaning the U.S. dollar was no longer backed by gold bars in storage, but solely by the government’s ability to repay its debts.
At first, this gave the U.S. government the ability to respond to crises like the stock market crash of 1987 by infusing money into the economy. However, it also arguably contributed to the current global credit crisis of the last few years. What began as a predominantly U.S. subprime mortgage crisis involving uncreditworthy borrowers and the banks that provided and subsequently repackaged this financing has morphed into a global sovereign debt crisis requiring bailouts of governments. Global stocks and real estate in some countries, perhaps artificially inflated by borrowed money, have subsequently fallen over the last 4 years. read full article