Gold Demonetization and the Price of Gold

In the late 19th century, the USA experimented briefly with a bimetallic standard. Both gold and silver were recognized as money. A bimetallic standard fails because of Gresham's Law. The government imposes a fixed exchange rate between gold and silver. When this drifts from the free market rate, people start hoarding the underpriced metal and selling the overpriced metal.

When silver was demonetized, the economy returned to a pure gold standard. The price of silver tanked. Since governments only recognized gold as valid for paying taxes and debts, this pushed up the price of gold. Government force made the price of gold artificially high and the price of silver artificially low. Government pushing up the price of gold is the same as government pushing down the price of silver. Under a gold standard, the price of silver is really the price of silver/gold. There was no incentive for holding silver, as it no longer could be used to pay taxes and debts.

In 1971, as the gold standard was about to be dropped, the leading economists made a prediction that shows how stupid economists are. They predicted that the price of gold would tank when gold was demonetized. When governments no longer accepted gold as valid for paying debts and taxes, the price of gold would crash. Before 1971, the US dollar was a promise to pay gold. The US was defaulting on its promise to pay gold because there was a shortage of gold. There were plenty of dollars; the government was printing them with abandon.

The gold standard was dropped. The US government defaulted on its promise to redeem dollars in gold. People were granted the right to own gold again. Contrary to everyone's prediction, the price of gold skyrocketed. The stupid economists were predicting that, after a default on a promise, the value of receipts for that broken promise would rise!