On August 15, 1971, President Richard Nixon decreed that the US dollar would no longer be redeemable for gold owed, even to foreign governments. This bad decision was a desperate attempt to avoid the consequences of previous bad decisions.
Nixon has decided to end the convertibility of gold. He claimed it was only temporary, but his executive order was a dishonorable breach of US government obligations.
Here is a brief history of the past bad decisions that led to Nixon’s very bad decision.
Nixon’s action came after a long string of bad policy decisions dating back to 1792, when the Coinage Act fixed the price of silver in gold, giving money holders unearned purchasing power.
Then, in 1834, the law changed, transferring wealth from owners of silver to owners of gold. The former were usually farmers and artisans who held money. These were usually the rich, who deposited gold in banks
In 1861, the government declared that paper money was not exchangeable for metal. In 1862, the government issued the famous “Greenbacks,” and in 1863, federally chartered banks could issue sunk banknotes. Declared legal tender, creditors had to either accept them or waive payment.
After the civil war, the government resumed cash payment, but created more mischief. The Coinage Act of 1873 effectively demonetized money. Farmers and artisans are suffering further losses and now have to pay gold debts.
The “crime of 73” was still in the minds of the 1896 election. William Jennings Bryan ran against William McKinley. Bryan wanted a return to the bimetallic system. McKinley was for the gold standard. McKinley won.
But Bryan resurfaced in the Woodrow Wilson administration and was instrumental in passing the Federal Reserve Act in 1913, giving the government a monopoly on issuing currency.
The Federal Reserve (the Fed) would have been created to stabilize the economy. The real result has been that the economy has been destabilized. The interest rate first went up and then went down. The Fed, being the lender of the last appeal, tempted the banks to speculate with this moral hazard – the removal of interest rates allowed them to have cheaper credit.
To avoid bank runs, President Franklin Roosevelt imposed another bad decision. He said it was a crime to own gold, nullifying all contractual clauses providing for payment in gold (except to foreign governments). The most conservative savers were forced to buy government bonds.
At the end of World War II, the Bretton Woods system was another bad policy decision. Other countries have had to treat the US dollar as if it were gold. Everyone assumed, especially US government officials, that this system was in the best interests of the United States. In fact, it was designed by Harry Dexter White, who later turned out to be a tool of the Soviet Union.
Indeed, the United States abused its “exorbitant privilege”, and some countries began to exchange their dollars for gold. Gold coming out of the US Treasury has accelerated. Nixon reacted to this crisis by ending the repayment of the dollar. He may have stopped gold withdrawals, but he accelerated public and private debt.
Today, central planners are redoubling their efforts to avoid debt collapse. Our monetary masters buy assets – billions and billions of assets. They think this will somehow shake off the unease that has persisted since the 2008 financial crisis.
And the next crisis may already be brewing. As the Fed buys treasury bills from banks, it simultaneously engages in reverse repurchase transactions. As part of the reverse repo, the Fed borrows liquidity from the banks, giving them treasury bills as collateral. It’s understood? The Fed buys bonds from banks, then turns around and temporarily sells the bond back to them (the reverse repo is a short-term contract).
Instead of central Fed planning, a gold standard is simpler and better. We the people should have the right to hold gold coins or bank deposits. This choice is essential for setting interest rates in a free market.