According to the Irish rock band U2 “nothing changes New Year’s Day”. I’m not a big fan of the group, but I like that song - “New Year’s Day” is its title and it appeared on their third album, “War”. It was released as a single in 1983 - the band’s first to make the charts here in the US. In the last stanza of the song they sing, “And we are told this is the golden age. Gold is the reason for the wars we wage”.

That’s a poetic turn of phrase and suggests that gold and war are somehow related. Perhaps they are. Earlier this year, British Member of Parliament and Historian (educated at Cambridge and Harvard) Kwasi Kwarteng, published a book called “Gold and War”. The book’s subtitle is “A 500-Year History of Empires, Adventures, and Debt,” and observes that historically, social upheaval and war are usually accompanied by an absence of a monetary gold standard.

Says Kwarteng, “The need to pay for wars was the principal engine of modern finance.” And of course implicit in that is the ability to print money without the constraints imposed by a gold standard. James Grant, financial journalist and founder of Grant’s Interest Rate Observer, in his review of Kwarteng’s book commented, “Mr. Kwarteng rightly observes that human monetary arrangements oscillate between ‘order and chaos.’ If order characterized the gold standard, which he allows, then our present-day setup must be counted chaotic”.

Another of Grant’s observations is that the reason why a deflationary depression ensued when Britain went back on the gold standard after WW1 is “the decision of the British government to return to the level of prices and wages that prevailed before the war, a decision it enforced through monetary means”. In other words, they priced gold at pre-war levels. However, during the war too much currency was printed and therefore gold should have been priced considerably higher to reflect this change in money supply.

According to James Rickards, author of two best-selling books, “Currency Wars” and “The Death of Money”, the Federal Reserve Bank did the same thing post WW1, causing massive deflation and ultimately - The Great Depression. The rest, as they say, is history. The US abandoned the gold standard in 1933, by presidential executive order, making private gold ownership illegal. With apologies to both U2 and Kwasi Kwarteng, I guess you could call that the “War on Gold” - a war that continued until the “gold prohibition” was rescinded in 1975.

After requiring every American to sell their gold to the US government at $20.67 per ounce, the US government then revalued gold at $35 per ounce - devaluing the dollar in the process by more than 40%. A good deal for the buyer - the government - but not so much for the seller - the public. Maybe that’s what was meant by the term - “New Deal”.

Since then, instead of being backed by gold, the dollar is backed by debt. How has that worked out? Prior to going off the gold standard the dollar was worth 1/20 of an ounce of gold. Today, it’s priced at just under 1/1200 of an ounce. That’s a pretty steep drop.

Theoretically, debt issuance and the new money it creates is supposed to act as a stimulus for economic growth. Not necessarily so says Rickards in a recent interview. Although in the post WWII boom era of the 1950s and 1960s, for every dollar of new debt there was $2.41 in new economic growth, by the time stagflation reared its ugly head in the late 1970s and early 1980s that ratio had declined to one dollar of new debt to 41 cents of new growth. Today, he says, one dollar of new debt only creates 3 cents of new growth. “GDP growth is flat-lining” and that “soon that ratio will go negative”. When that happens, he says, “This is a signal of complex system about to collapse”. In other words, just like with people, once the economy becomes overstimulated, further stimulus can be counter-productive and even damaging.

Although the US dollar was taken off the gold standard in 1933, up until very recently it has still been considered “as good as gold” in international trade - largely because it has always been backed by “the full faith and credit of the United States government”. That phrase has maintained its meaning over the years because we had earned that trust by our actions. Further, the US dollar isn’t the only currency to abandon the gold standard; during the 20th century, every currency, without exception, decoupled from the gold standard. However, it was the US dollar that inspired the most trust and therefore became the currency of choice for facilitating international trade.

As we say goodbye to 2014 and welcome in 2015 it remains to be seen as to whether or not that remains the case. I suspect not. Just as individuals need to be responsible with regard to the use of credit and debt, so do nations.

While U2 is right, nothing changes New Year’s Day, change does happen. Regarding the line from the song: “And so we are told this is the Golden Age”. That was 1983 and our debt to GDP ratio was only 37%. Today it stands at 103%.