Unhappy Anniversary

This month represents 45 years since President Richard Nixon closed the "gold window" thus severing the last link between the US Dollar and gold. The results have been 45 years of economic instability, declining living standards for the lower class, a growth in the welfare-warfare state, and growing income inequality. This was also the event that inspired Ron Paul to run for Congress.

Of course, America was suffering from those maladies before Nixon's actions. In fact, Nixon closed the gold window because of the run on the window by foreign institutions. Those institutions were concerned about the U.S. federal government's rapidly rising debt that resulted from Lyndon Johnson's "guns and butter" spending on Great Society programs and the Vietnam War.

Nixon's actions put an end to the system established by the Bretton Woods agreement. Under Bretton Woods, global exchange rates where pegged to the value of the dollar. The dollar would be tied to gold. Most -- including a number of so-called "free-market" economists -- endorsed this system. Meanwhile, followers of the Austrian School (most notably Henry Hazlitt) saw that the Bretton Woods system was bound to fail. The Mises Institute has collected Hazlitt's anti-Bretton Woods writings in From Bretton Woods to World Inflation: A Study of Causes and Consequences.

"Mr. Libertarian" Murray Rothbard commented on Nixon's actions in the November, 1971 issues of his Libertarian Forum newsletter:

By cutting all ties with gold, furthermore, Nixon has gone over into totally fiat money; he has cut the last link, with an independent, market, commodity check upon inflation. Austrian economists like {Jacques} Rueff realized that, while the dollar may have been overvalued in relation to foreign currencies, going over to a floating rate is a cure worse than the disease: for it abandons the last, balance-of-payments, check upon American inflation.

Before August 15, the American authorities at least had to keep a wary eye on the balance of payments deficit and the gold outflow, and therefore were at least partially restrained in their inflation of the money supply. Now, only falling exchange rates remain as a check, and this is a flimsy reed, especially since American export interests are whooping it up for devalued dollars which would bring them competitive advantages abroad.

What else could President Nixon have done? He could have adopted the Rueff plan: of a drastic increase in the price of gold, and a concomitant move toward restoration of the full international gold standard.

But this of course is the last thing the Administration—and the entire economic Establishment—wants. Note, for example, how stubbornly Secretary Connally has resisted even the most feeble West European efforts to induce us to raise the price of gold by only a negligible amount. The reason is that the Establishment knows full well that a rise in the price of gold would bring gold back more strongly into the international scene.

It would hinder the long-run aim of the Establishment to abandon gold altogether. Hence, no libertarian can look upon the abandonment of Bretton Woods for a far worse system as anything but an economic disaster.

......

And so President Nixon, in the international part of his NEP package, has plunged the world into a system far worse than the unfortunate Bretton Woods system that is now dead as a doornail.

Our Caesar has plunged us back into the destructive world of the 1930’s, into a world of unchecked paper inflation, of exchange controls, economic warfare, accelerating protectionism, and breakup of the world market. He has plunged us, in short, into the precise international counterpart of the economic fascism at home. The package is, we must admit, consistent and of a piece: in both domestic and foreign economic policy, the aggrandizement of the nation-state, the crushing of the market economy, the perpetuation of inflation, the substitution of statism and conflict for the harmony and voluntarism of the free market. We are faced, in the economic sphere, with fascism in domestic policy and foreign, at home and abroad. And all this, mind you, in the name of “freedom”.

You can find the whole article, along with every other article published in the Libertarian Forum here.

Paul-Martin Foss, writing at the Mises Institute, has a thought on how we should remember the day Nixon closed the gold window. He also provides a chart showing how even the government's statistics cannot hide how Nixon's actions have effected our purchasing power:

The demonetization of silver in the Coinage Act of 1873 was widely assailed by its critics as the “Crime of ’73.” Isn’t it about time that Nixon’s closing of the gold window be known as the Crime of ’71?

Read the whole article here.

Daniel Fernández Méndez, also writing at Mises Institute, has some additional insights into the economic effects of Nixon severing the last link between the dollar and gold:

Tthe gold standard and the currency convertibility are really a restraint to public spending and inflation, then it should be seen in the pre-1971 and post-1971 figures. The period from 1951 to 1971 had an average federal deficit to GDP of 0.6%. From 1972 to 2015, this figure rose to 3.0%. These numbers suggest that the gold standard effectively controlled public debt, as the risk of gold loss by the central bank would have prevented debt monetization.

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Impossibility of Risk Protection

It is important to clarify the concept of the “last gold standard,” the modified gold standard that followed World War I. In the classic gold standard that existed prior to 1914, the general public was able to withdraw gold from the central bank if they wished. This was gradually restricted until after World War II, when only states could redeem coins in gold (everything was reduced to dollars and the exchange of gold for dollars was left to other states). Beginning in 1971, gold completely disappeared from the picture. For ordinary people, the result is an inability to maintain their wealth without risk. With gold as the monetary base, the saver has three possibilities:

If the saver trusts the stability of the economy and of the currency, she can invest her money in an investment project and make a return on it. In this way, she maintains her assets in non-liquid form with an expected return. However, she faces the risk of loosing her assets if the investment is bad.

If the saver does not trust the stability of the economy but trusts the stability of the currency, she can keep her assets in a bank account. Here her assets will be liquid and they will maintain their value without risk.

If the saver does not trust the stability of the economy and of the currency, she can maintain her assets as gold and stay liquid (gold is the base currency). This can help protect the value of her assets from economic and monetary turmoil.

In a system without convertibility, like the one we have lived in since 1971, the third option disappears. In other words, if a person thinks the economy is entering a recession (economic instability) and that the monetary authorities are behaving irresponsibly by, for example, monetizing too much debt (monetary instability), she is forced to choose between losing her assets with an investment project or by keeping liquid balances that will depreciate as a result of careless monetary policy. Economic agents who want to protect themselves against inflation must either forcibly buy illiquid real assets — capital goods or real estate — with the danger of losing them (because of economic or housing crises) or maintain a currency that will lose its value because of bad monetary policy. Leaving the system by remaining liquid is no longer an option, effectively turning everyone into a speculator.

Gary North compares Nixon's promises to the results of 45 years of fiat money. He also provides a chart showing the decline in productivity sine the closing of the gold window:

Nixon went on:

This not only requires bold leadership ready to take bold action--it calls forth the greatness in a great people.Prosperity without war requires action on three fronts: We must create more and better jobs; we must stop the rise in the cost of living; we must protect the dollar from the attacks of international money speculators. "We" must create better jobs.

Who are "we"? "We" must stop the rise in the cost of living. Over the next decade, prices rose faster than at any other time in peacetime American history.

"We" must protect the dollar from international speculators. Why did it need protecting? Because the Federal Reserve was inflating to get the economy out of Nixon's two-year recession.

One of the cruelest legacies of the artificial prosperity produced by war is inflation. Inflation robs every American, every one of you.True.

But price inflation rose as never before in the United States under what he called the "new economic policy" -- Lenin's phrase from 1921. I have today appointed a Cost of Living Council within the Government.

I have directed this Council to work with leaders of labor and business to set up the proper mechanism for achieving continued price and wage stability after the 90-day freeze is over.

Let me emphasize two characteristics of this action: First, it is temporary. To put the strong, vigorous American economy into a permanent straitjacket would lock in unfairness; it would stifle the expansion of our free enterprise system.

And second, while the wage-price freeze will be backed by Government sanctions, if necessary, it will not be accompanied by the establishment of a huge price control bureaucracy.

I am relying on the voluntary cooperation of all Americans-each one of you: workers, employers, consumers-to make this freeze work. Controls lasted almost three years. I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

Temporary = 45 years. As we move into a generation of peace, as we blaze the trail toward the new prosperity, I say to every American: Let us raise our spirits. Let us raise our sights. Let all of us contribute all we can to this great and good country that has contributed so much to the progress of mankind.

Let us invest in our Nation's future, and let us revitalize that faith in ourselves that built a great nation in the past and that will shape the world of the future. Thank you and good evening.

This speech marked the end of America's uncontested economic domination. The Dow Jones Industrial Average rose 33 points the next day. The National Association of Manufacturers praised Nixon's program. The Chamber of Commerce praised it. A blind man led the business community into the ditch.

A PHONY GOLD STANDARD

We blame Nixon in retrospect. But he was merely a caretaker for a fiat money/fixed exchange rate (price control) monetary system that had to fail. Price controls always fail. Gresham's law is always obeyed. Keynesianism does not work as promised. What should we have expected from a monetary plan designed by Keynes?

Read the whole article here.

Campaign for Liberty is working to restore sound monetary policy, starting with ending the Federal Reserve secrecy by Auditing the Fed.