This month marks the 50th anniversary of gold’s demise. Or perhaps I should say money’s demise.
For in August 1971, 50 years ago, President Richard Nixon took the United States off the gold standard, and for the first time in the history of the world gold played no part in the monetary system.
Gold was $35 an ounce at the time. Today it hovers around $1,800 an ounce. That gives you an idea of how much the dollar has been devalued by. From $35 to $1,800, in just 50 years. That’s quite something.
And the US dollar has been one of the better currencies.
The British pound or the Italian lira have done far worse – and those were the currencies of G7 nations. Heaven forbid you should have been subject to the national currencies of countries such as Brazil, Argentina, Turkey or Zimbabwe.
It all started so well.
In July 1944, as it was becoming clear that the Axis nations were going to lose World War Two, delegates from the 44 Allied Nations met at the Mount Washington Hotel in Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference, now known as Bretton Woods.
Their goal was to negotiate a new monetary order, so that international economic relations could be rebuilt after the war. After three weeks of deliberations, setting up a system of rules, institutions, and regulatory procedures, the delegates signed – well, mostly. Soviet representatives declined, saying the institutions that had been created, which included the IMF and the World Bank Group, were “branches of Wall Street”. The Soviets may have had a point.
The deal suited the United States. Countries had to adopt monetary policies that maintained exchange rates within 1%, by tying their currencies to gold. The United States controlled two-thirds of the world’s gold, and so insisted that the Bretton Woods system rest on both gold and the US dollar.
By 1958, the Bretton Woods system was fully operational. Countries settled their international accounts in dollars, convertible to gold at $35 per ounce. Effectively, the US was on a gold standard, and the rest of the world was on a dollar standard.
But then the costs of the US government began to grow, in particular the cost of its military industrial complex and its welfare. It got involved in an expensive and, in the case of Vietnam, some might say, needless wars. President Lyndon B. Johnson spent enormous amounts on welfare. Some might say to buy votes. The Federal Reserve, central bank of the US, printed more money.
As German and Japanese economies grew, the US share of the world economy shrank.
Non-American nations felt aggrieved that they had to produce one hundred dollars of goods and services to get a $100 bill, which the US could just print. The French called it “America’s exorbitant privilege”. By 1965 French President Charles de Gaulle had had enough. There were rather more US dollars in the world than there was gold to back them, he felt, and he was right. By 1967 US foreign liabilities were $36 billion, but it only had $12 billion in gold reserves. In practice the dollar was only about a third backed.
Gold may work but gold standards tend not to. Keynes called them “barbarous”, which is rather hypocritical given he had designed this one.
Successive administrations had tried to stop the outflow of gold from the US. In 1959 President Eisenhower made it illegal for Americans to buy gold overseas. President Kennedy tried to prevent Americans investing overseas with his Equalization Tax on foreign currency deposits, which came into being after his death. President Johnson discouraged Americans from traveling altogether. “We may need to forgo the pleasures of Europe for a while”, he said. “I am asking the American people to defer, for the next two years, all non-essential travel outside the western hemisphere”.
De Gaulle, who wanted a return to a proper gold standard, not this quasi system, began redeeming French dollars for gold. The French even sent battleships to New York to collect their dues. De Gaulle became the subject of several assassination attempts, co-incidence I’m sure.
West Germany, Spain, Switzerland were among many of the nations demanding redemption of their dollars for gold. Even America’s poodle, the British, for whom sterling had just been through one of its quadrennial collapses, asked the Americans to prepare $3bn worth of Fort Knox gold for withdrawal.
On Friday August 13 1971, Nixon met with Federal Reserve chairman Arthur Burns, incoming Treasury Secretary John Connally, future Fed Chairman Paul Volcker and 12 other high-ranking White House and Treasury advisors, at Camp David, the President’s country home in Maryland.
The following Sunday, Nixon, relying heavily on the advice of his very confident Treasury Secretary, Connally, announced that US dollars would no longer be redeemable for gold. He imposed wage and price controls to counter inflation – a 90-day freeze on prices and wages. And he imposed a 10% tax on imports to protect American products.
The bottom line is that Nixon didn’t have the gold to pay for all the explosives America had dropped, and was continuing to drop, on south-east Asia, nor for all its welfare.
It was a temporary measure. But like those other temporary measures, such as Income Tax, Quantitative Easing and masks, it has become permanent.
“What a tragedy for mankind”, said FED chairman Arthur Burns, when he realised what President Nixon was doing. He was right.
Without the discipline of gold, western governments have bloated to unprecedented size, fat on waste, war and welfare, intervening in areas of our lives never before thought possible. The consequences of the new fiat, petro-dollar system have taken manifold forms, from rampant inequality to successive financial crises. “Fix money, fix the world”, is the mantra of the Bitcoiners. They’re right. But in 1971 the President nixed money.
*Dominic Frisby is the author of Daylight Robbery – How Tax Shaped The Past And Will Change The Future, out now at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.