Fifty years ago this week, President Richard Nixon slammed shut the “gold window” and eliminated the last vestige of the gold standard.
Nixon ordered Treasury Secretary John Connally to uncouple gold from its fixed $35 price and suspended the ability of foreign banks to directly exchange dollars for gold. During a national television address, Nixon promised the action would be temporary in order to “defend the dollar against the speculators,” but this turned out to be a lie. The president’s move permanently and completely severed the dollar from gold and turned it into a pure fiat currency.
Nixon’s order was the end of a path off the gold standard that started during President Franklin D. Roosevelt’s administration. June 5, 1933, marked the beginning of a slow death of the dollar when Congress enacted a joint resolution erasing the right of creditors in the United States to demand payment in gold. The move was the culmination of other actions taken by Roosevelt that year.
In March 1933, the president prohibited banks from paying out or exporting gold, and in April of that same year, Roosevelt signed Executive Order 6102. It was touted as a measure to stop hoarding, but was, in reality, a massive confiscation scheme. The order required private citizens, partnerships, associations and corporations to turn in all but small amounts of gold to the Federal Reserve at an exchange rate of $20.67 per ounce. In 1934, the government’s fixed price for gold was increased to $35 per ounce. This effectively increased the value of gold on the Federal Reserve’s balance sheet by 69%.
For those who don’t know what Jack is referencing, 1971 is the year that the US began to see a serious decline of the middle class, and a massive expansion of income inequality.
It’s also the year that Nixon took the US dollar off the gold standard.https://t.co/GR94Cdlr0e
— Spike Cohen (@RealSpikeCohen) August 15, 2021
The reason behind Roosevelt’s executive order and the congressional joint resolution was to remove constraints on inflating the money supply. The Federal Reserve Act required all Federal Reserve notes have 40% gold backing. But the Fed was low on gold and up against the limit. By increasing its gold stores through the confiscation of private gold holdings, and declaring a higher exchange rate, the Fed could circulate more notes.
While American citizens were legally prohibited from redeeming dollars for gold, foreign governments maintained that privilege. In the 1960s, the Federal Reserve initiated an inflationary monetary policy to help monetize massive government spending for the Vietnam War and Pres. Lyndon Johnson’s “Great Society.” With the dollar losing value due to these inflationary policies, foreign governments began to redeem dollars for gold.
This is exactly how a gold standard is supposed to work. It puts limits on the amount the money supply can grow and constrains the government’s ability to spend. If the government “prints” too much money, other countries will begin to redeem the devaluing currency for gold. This is what was happening in the 1960s. As gold flowed out of the U.S. Treasury, concern grew that the country’s gold holdings could be completely depleted.
Instead of insisting on fiscal and monetary discipline, Nixon simply severed the dollar from its last ties to gold, allowing the central bank to inflate the money supply without restraint.
When he announced the closing of the gold window, Nixon said, “Let me lay to rest the bugaboo of what is called devaluation,” and promised, “your dollar will be worth just as much as it is today.”
This was also a lie.
The dollar has lost more than 85% of its value since Nixon’s fateful decision, based on the CPI calculator. The purchasing power of a 1971 dollar is equal to about 15 cents today.
Meanwhile, the dollar value of gold has gone from $35 an ounce to just over $1,700 an ounce today. In percentage terms, that’s a 4,757% increase.
Investment analyst Nick Giambruno said this was an entirely predictable consequence of the US abandoning sound money.
By every measure—including stagnating wages and rising costs—things have been going downhill for the American middle class since the early 1970s. August 15, 1971, to be exact. This is the date President Nixon killed the last remnants of the gold standard. Since then, the dollar has been a pure fiat currency. This allows the Fed to print as many dollars as it pleases. And—without the discipline imposed by some form of a gold standard—it does precisely that. The U.S money supply has exploded 2,106 percent higher since 1971. The rejection of sound money is the primary reason inflation has eaten up wage growth since the early 1970s—and the primary reason the cost of living has exploded.”
Another consequence has been an enormous national debt that continues to grow at a staggering pace. Most people don’t realize it, but this is a direct and intentional result of the current fiat money system.
Dollar devaluation is considered an acceptable tradeoff because a free-floating currency is exactly what the government needed. It would be impossible to fund the American welfare and warfare state with a currency constrained by gold. With the dollar untethered from any fixed standard, Uncle Sam could create as many dollars as it pleased in order to fund all of its massive social and military programs. With a free-floating fiat currency, the US government can borrow as much money as it needs, knowing that the central bank will always be there to monetize the debt and backstock the spending.
And that’s exactly what has happened.
As Frank Holmes put it in an article published by Forbes, “there’s been a significant and growing lack of discipline when it comes to government spending,” since Nixon’s fateful act.
Before 1971, there was a natural limit to how much money could be printed. New issuances were dependent on the amount of gold sitting in the nation’s coffers. Today, with the dollar backed not by a hard asset but by the ‘full faith and credit’ of the US government, the federal debt is closing in on an astronomical $28 trillion, which is more than 130% of the size of the US economy.”
To put this into perspective, in 1960, the national debt was just a little over half the size of the US economy.
This is exactly what politicians like Nixon, Ford, Carter, Reagan, Bush I, Clinton, Bush II, Obama, Trump and Biden wanted — the ability to spend without restraint and grow government with no limits. The result: massive national debt and devalued currency that buys the average person less and less every year.
As Ryan McMaken summed up in an article on the Mises Wire:
Nixon yearned to be free of this restraint so he could spend dollars more freely, and not have to worry about their value in gold. Nixon’s move was, in short, the final and total politicization on money itself.”
For most people, this anniversary will pass unnoticed. But it should be a day that lives in infamy.