The Dollar Anniversary

Much has been made of this week’s 40th anniversary of Richard Nixon’s resignation from the presidency. But while politicians come and go, it is their policies that live after them.

Friday is another Nixon anniversary. It marks 43 years since Nixon announced a major policy, one that continues to play out today and is now hastening to an unhappy conclusion.

It was on Aug. 15, 1971, that Nixon severed the last remaining link of the U.S. dollar to gold.

Under the post-World War II monetary order, the rest of the world had been persuaded to hold dollars as reserves and conduct international commerce in dollars. But U.S. politicians of both parties had a grand time for years spending money and buying votes on left and right to delight their special constituencies. There was the Great Society and the Vietnam War, too. Because they had the Federal Reserve to print money for them, it had been a wild spree.

But like any ne’er do well, the U.S. was writing bad checks. The state was issuing more dollars than it could possibly redeem for gold at the promised exchange rate of $35 per ounce.

The rest of the world saw the U.S. money printing under the dollar/gold exchange standard, and noted the falling purchasing power of the dollars they held.

On Aug. 15, 1971, Nixon severed the last remaining link of the U.S. dollar to gold.

They began to race for the exits. They wanted to cash their paper dollars in for gold while they could.

On just one day in March 1968, dollar holders lined up to cash in their paper money and took 400 tons of gold off America’s hands. By 1970, the U.S. had only enough gold to cover 22 percent of the dollars held by foreign central banks.

Like a run on the bank, the demand to exchange dollars for gold was beyond containment.

It was a Sunday night when Nixon went on national television to announce his strangely Soviet-sounding “New Economic Plan.”

Ever the politician, Nixon was perhaps as much concerned that night with pre-empting the popular TV show Bonanza as he was with the destructive impacts — some of them well known to him — of the policies he was to announce.

Nixon decided to find a bogeyman to blame for the government’s wastrel ways. He chose “international money speculators.”

The crisis of the U.S. writing hot checks was their fault.

In making his case against them, Nixon uttered more monetary babble. “The strength of a nation’s currency is based on the strength of that nation’s economy,” he said. But that was simply untrue: America’s economy has been growing while the value of the dollar was sinking.

Of course the people’s productivity was responsible for the growth of the economy, while the government and only the government was responsible for debauching the currency.

And so on that hot August night in 1971, Nixon closed the gold window and abandoned any pretense of dollar redeemability in gold.

Oh, to be sure, it was only “temporary,” explained the President.

That was 43 years ago.

As Milton Friedman noted, nothing lasts as long as a temporary government program.

And so we find ourselves on the doorstep of a long-brewing currency crisis. With the dollar redeemable in nothing, what would act as a restraint on the issuance of more and more dollars, an endless torrent of money printing?

Nothing at all. That is why in the current crisis, the Federal Reserve has been printing dollars by the trillions.

If the rest of the world noticed that they were having difficulty cashing in their dollars for gold decades ago, consider how they must feel today knowing that there is nothing to cash them in for.

An account of Nixon’s policy announcement 43 years ago would be incomplete if it didn’t highlight one other calamity he introduced that Sunday night.

Abandoning the gold standard was effectively a devaluation of the dollar. “If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today,” Nixon lied.

As he spoke he knew that the dollar would not be worth “as much tomorrow,” which is why he also announced a strict program of wage and price controls that night.

It was a ham-handed attempt to hide what was being done to the dollar’s purchasing power, freezing prices by governmental edict.

The price controls led to their own unhappy chain of consequences beginning with empty shelves in the stores and spreading shortages. Eventually the broad fixing of consumer prices was lifted, and goods returned to the shelves, although at much higher prices.

But the totally fiat, unbacked dollar that Nixon unilaterally announced that night persisted.

We are speeding toward a crisis of resolution. At every hand what I have termed “the rest of the world” in this article, meaning the central banks and governments of foreign nations, are taking steps to insulate themselves from the coming dollar crisis.

The BRIC nations have funded and created their own IMF-like monetary bank. Russia and China are moving forward on their non-dollar currency agreement. Other nations are making similar bi-lateral and multi-lateral currency arrangements. With the U.S. imposing sanctions far and wide and fining banks as a primary tool of foreign policy, the resistance to dollar imperialism is becoming vocal.

Many of the central banks are using dollars to add to their gold reserves. They may not mind fleecing their citizens with their own debased currencies, but they didn’t want to be victimized by ours 43 years ago. And they still don’t want to be victimized by it today.

And neither should you.

For some memories and observations about the ending of the gold standard, be sure to listen when Ron Paul and I mark the anniversary of Nixon’s Aug. 15, 1971, New Economic Policy on our weekly podcast Friday. It was an event that was to play a significant part in Ron Paul’s future.

We post a new podcast each week, available free right on the front page of MoneyandMarkets.com.

Best wishes,

Charles Goyette