Ironically, as gold prices are currently experiencing record spikes, today marks the 40th anniversary of what is considered by many to be one of the dramatic events in the history of economic policy– the end of the U.S. gold standard.
On August 15, 1971, then-President Richard Nixon ended the monetary system, which had fixed the price of the American dollar to gold and would keep the price of gold at $35 an ounce. It would sound the death knell for the Bretton Woods Agreements which had made the gold-fixed U.S. dollar the foundation of the global economy.
Prior to 1971, there had been an unspoken understanding among foreign treasuries and central banks not to ask for gold in order to avoid triggering a gold run. By the early 1970s, accelerated inflation rates and the long involvement in the Vietnam War decreased faith in the U.S. dollar.
Now, other nations wanted to redeem their dollar holdings for gold, thereby threatening to deplete U.S. gold reserves. France had already redeemed $191 million for gold as the British government asked to redeem $3 billion in U.S. dollars for gold.
The U.S. was also concerned about its deficit in balance of trade with Japan, as more U.S. industries complained about the Japanese competition. Free-market economists in the Nixon Administration believed closing the gold window and allowing the dollar to decline in value against the yen was a good solution.
Then Treasury Secretary John Connally insisted the international gold situation was the main problem, while Federal Reserve Chief Arthur Burns argued against closing the gold window. Connally convinced Nixon to take action immediately. Nixon, who was facing re-election, reportedly felt compelled to take extreme measures to assure his re-election, asserted Herbert Stein, a member of the White House Council of Economic Advisors in August 1971.
One of Nixon’s chief economic advisors, renowned free-market economist Milton Friedman had advocated cutting all ties with gold in favor of an absolute fiat dollar standard with all currency governed by the Federal Reserve System.
In an October 2000 interview with PBS, Friedman said the policies of the Kennedy and Johnson Administration had made it very difficult for the U.S. to keep the price of gold at that level. “We had inflationary policies, which led to a tendency for the gold to flow out, for the price of gold to go above $35 an ounce. And the situation had become very critical in 1971. Nixon had to do something about that.”
In Nixon’s speech on Sunday night, August 14, 1971, the President said his administration was “going to take action, not timidly, not half-heartedly, and not in piecemeal fashion.” From that moment, the U.S. dollar floated like other global currencies, and a new global monetary order was created.
Friedman would later insist, “If he had done nothing but close the gold window, if he had said the United States was going off the gold standard and done nothing else, every headline in every newspaper would have been, ‘That negative Nixon again! Just a negative act.’ And so instead he dressed it up by making it part of a general economic policy, a recovery policy, in which wage and prices controls, which the Democrats had been urging all along, because a major element.”
“And by putting together the combination of the gold window and at the same time having wage and price controls, he converted what would have been a negative from a political point of view to a political positive. And that was the political reason for which he did it,” Friedman concluded.
However, in an article published this month, the organization The Gold Standard now puts it more bluntly, “For the sake of politics, the gold standard was sacrificed.”
Forty years after Aug. 15, 1971, some argue Nixon’s decision led to the mess the U.S. and other countries find themselves in today-a rapidly declining dollar, trade imbalances and enormous debt.
As Edmond Conway of The Telegraph noted in an commentary published Saturday–“Were it not for that decision, it is quite feasible that we would not have suffered the financial crisis of the past four years, or indeed the crisis after crisis that have beset the world’s markets. We may not have just faced the most volatile few weeks in markets since 2008.”
The late Wall Street Journal Editor Robert Barley argued the decision “did more tangible harm than any other action during the Nixon Administration, including Watergate.”
John Tamny, the editor of RealClearMarkets and Forbes Opinions, asserts, “Looking back on the 40 years since policymakers unlinked the dollar from gold, though we’ve made astounding economic progress, it’s important that we consider the unseen in this equation. While it’s our nature to evolve and innovate, what will forever remain unknown is just how much more advanced we’d be if the dollar’s stability had remained policy.”
“Floating money values, though not a policy of the past, will, if allow, author our descent into it,” he cautioned. “To reverse a needless decline, it’s essential that we revert to the historical norm of stable, gold-fined money values that are so essential to a thriving, evolving economy.”
Ironically, the same GOP which did away with the gold standard 40 years ago now is filled with gold bugs, as columnist and economist Paul Krugman observed in 1996. “…Midas’ true sin was his failure to understand monetary economics. What the gods were telling him is that gold is just a metal.’
“There is a case to be made for the gold standard. It is not a very good case, and most sensible economists reject it, but the idea is not completely crazy. Their belief in gold is, it turns out, not pragmatic but mystical,” Krugman asserted.
Forbes contributor Nathan Lewis recently called for the introduction of gold-linked paper currencies, which would be totally voluntary, would trade alongside existing fiat currencies, and not be taxed in trading. Once the concept is proven, “a number of currencies could emerge worldwide. Since they are all linked to gold, they would all trade at fixed exchange rates.”
Lewis envisions a global “gold bloc” of entities that prefer to do business in gold-linked currencies. “Soon it would dawn on a broad swath of the public worldwide that these fiat currencies are doomed and they would rush to the network of gold-linked currencies.”
Eventually, Lewis suggests, fiat currencies would become irrelevant. “And thus, without a single academic debate, without any dramatic government actions, by way of a transition period determined by the people themselves at their own pace, the world would dispose of the Keynesians and their funny paper.”
“If you were given the choice, would you rather do business in a gold-linked currency or fiat paper locked in a spiral of decline?” Lewis asks.
“When people have actually been given this choice, throughout history, they always choose gold,” he concludes.
IPad version- Richard Milhous Nixon picture courtesy U.S. National Archives