My generation says: "Each of us can remember where he was
when he heard about Kennedy's assassination.
I can remember where I was when I heard about Nixon's killing of
the phony gold standard that John Maynard Keynes and the Soviet spy Harry Dexter White designed in
1944.
It was a Sunday afternoon: August 15, 1971. I was preparing to
leave Riverside, California to move to Irvington-on-Hudson, New York, to get my
first full-time job. I would soon be a senior staff member of the Foundation
for Economic Education. I would never again attend a graduate seminar. Free at
last! Free at last!
The phone rang. My friend Bob Warford told me the news. Nixon had
just announced that the U.S. Treasury would no longer sell gold to central banks
at $35 an ounce or any price. He had floated the dollar: no more fixed exchange
rates. It was the end of the Bretton Woods agreement. He had also declared
full-scale price and wage controls. He had done this without consulting with
Congress.
Here are the first
two paragraphs. They are the words of a desperate man who refused to
face reality on two fronts: foreign policy and monetary policy.
I have
addressed the Nation a number of times over the past 2 years on the problems of
ending a war. Because of the progress we have made toward achieving that goal,
this Sunday evening is an appropriate time for us to turn our attention to the
challenges of peace.
America today has the best opportunity in
this century to achieve two of its greatest ideals: to bring about a full
generation of peace, and to create a new prosperity without war.
The Vietnam war did not end in his term of office. It ended in
defeat in 1975.
This nation is still at war in Afghanistan. It is the forever war
-- the war on terrorism.
The controls were supposed to last 90 days. They lasted until
April 1974.
Real wages began to stagnate in 1973.
Nixon went on:
This
not only requires bold leadership ready to take bold action--it calls forth the
greatness in a great people.
Prosperity without war requires action on
three fronts: We must create more and better jobs; we must stop the rise in the
cost of living; we must protect the dollar from the attacks of international
money speculators.
"We" must create better jobs. Who are "we"?
"We" must stop the rise in the cost of living. Over the
next decade, prices rose faster than at any other time in peacetime American
history.
"We" must protect the dollar from international
speculators. Why did it need protecting? Because the Federal Reserve was
inflating to get the economy out of Nixon's two-year recession.
One of
the cruelest legacies of the artificial prosperity produced by war is
inflation. Inflation robs every American, every one of you.
True. But price inflation rose as never before in the United
States under what he called the "new economic policy" -- Lenin's
phrase from 1921.
I have
today appointed a Cost of Living Council within the Government. I have directed
this Council to work with leaders of labor and business to set up the proper
mechanism for achieving continued price and wage stability after the 90-day
freeze is over.
Let me emphasize two characteristics of
this action: First, it is temporary. To put the strong, vigorous American
economy into a permanent straitjacket would lock in unfairness; it would stifle
the expansion of our free enterprise system. And second, while the wage-price
freeze will be backed by Government sanctions, if necessary, it will not be
accompanied by the establishment of a huge price control bureaucracy. I am
relying on the voluntary cooperation of all Americans-each one of you: workers,
employers, consumers-to make this freeze work.
Controls lasted almost three years.
I have
directed Secretary Connally to suspend temporarily the convertibility of the
dollar into gold or other reserve assets, except in amounts and conditions
determined to be in the interest of monetary stability and in the best
interests of the United States.
Temporary = 45 years.
As we
move into a generation of peace, as we blaze the trail toward the new
prosperity, I say to every American: Let us raise our spirits. Let us raise our
sights. Let all of us contribute all we can to this great and good country that
has contributed so much to the progress of mankind.
Let us invest in our Nation's future, and
let us revitalize that faith in ourselves that built a great nation in the past
and that will shape the world of the future.
Thank you and good evening.
This speech marked the end of
America's uncontested economic domination.
The Dow Jones Industrial
Average rose 33 points the next day. The National Association of Manufacturers
praised Nixon's program. The Chamber of Commerce praised it.
A blind man led the business
community into the ditch.
A PHONY GOLD STANDARD
We blame Nixon in retrospect. But he was merely a caretaker for a
fiat money/fixed exchange rate (price control) monetary system that had to
fail. Price controls always fail. Gresham's law is always obeyed.
Keynesianism does not work as promised. What should we have
expected from a monetary plan designed by Keynes?
Fact: every gold standard
that is guaranteed by a government is fake. It's not worth the paper it's
written on. It relies on these words: "Politicians' promise." I have
written about this here.
In late 1914, governments of Europe suspended payment. Payment was
never restored.
England restored payment, 1925 to 1931. Then it left gold. It has not
returned.
Franklin Roosevelt unilaterally took the U.S. off the gold coin
standard in 1933. He made it illegal for Americans to own bullion. That lasted
until January 1, 1974.
The Bretton Woods system was based on government-enforced fixed
exchange rates between currencies was a gigantic system of price controls. It
led, as price controls always do, to gluts of overvalued currencies and
shortages of undervalued currencies: Gresham's famous law in action. There were
devaluations from time to time. These were the result of Gresham's law, not
speculators in the currency markets.
Bretton Woods was also based on on a promise by the United States
government to sell gold at $35/oz to foreign governments and central banks.
Nixon broke the promise. He did so with these words:
To our
friends abroad, including the many responsible members of the international
banking community who are dedicated to stability and the flow of trade, I give
this assurance: The United States has always been, and will continue to be, a
forward-looking and trustworthy trading partner. In full cooperation with the
International Monetary Fund and those who trade with us, we will press for the
necessary reforms to set up an urgently needed new international monetary
system. Stability and equal treatment is in everybody's best interest. I am
determined that the American dollar must never again be a hostage in the hands
of international speculators.
In short, "Fool you once, shame on me. Fool you twice, shame
on you."
Later that year, Treasury Secretary John Connally put it
succinctly at the G-10 meeting: "The dollar is our currency, but it's your
problem." Indeed, it was.
To see what happened next, go to the Inflation Calculator of the
Bureau of Labor Statistics. Go to 1971. Type in a figure. See how much money
you would need today to match this. This may shock you. I have created a link
for you to use, easily remembered: http://bit.ly/BLScalc.
If the free market does not produce a gold standard, it's a fake
standard. It is based on government promises. Do not trust it.
Nixon implemented what was implicit from the beginning: a
violation of contract with the public.
Roosevelt had broken the contract with the American public in
1933. Nixon simply extended the betrayal to foreign central banks. It can be
summarized in three words: "You dumb clucks."