Market Overview

The Day Richard Nixon Killed the Gold Standard

August 15, 1971 was a day just like any other for then-President Richard Nixon.

Nixon woke up early, usurped powers reserved for Congress, engaged in illegal wars, spied on Americans. In other words, he behaved exactly like Gerald Ford, Jimmy Carter, Ronald Reagan, George Bush I, Bill Clinton, George Bush II, and Barack Obama.

Well, not entirely like his successors in office. On this particular day forty years ago, tossed out his version of "Shock and Awe Economics". The plan was an amazing mix of vaguely unconstitutional measures and half-hearted attempts at central planning. It was a grab-bag mix of stunning failures with one partial success.

The Nixon plan — known as the Nixon Shock — stunned the world. From the end of World War II until Nixon released the Kraaken, the various world currencies had been pegged to the USD, which was pegged to the price of gold. At any time, another country could literally take their U.S. Dollars and exchange them for gold from the United States gold reserves. The tension between all these different pegged currencies and USD/gold provided the backbone to the world economy, and (at least in theory) provided a reasonable price range around which economies could operate. It gave certainty.

Well, I should say, it gave certainty until it didn't. I guess that's a bit like saying it worked until it didn't work, but that's exactly what happened with the first Bretton Woods system. Let's take a closer look.

In 1971, America was stuck with a bit of an economic crisis. Inflation had jumped up to nearly 6 percent, primarily because of Vietnam and the deficit spending necessary to pay for the war. The debts made investors nervous about hanging on to U.S. dollars, and the market reflected this. The world threatened a gold run — essentially trading in all our dollars back for all our gold. As more gold left the system, the problem would become worse until, finally, there would be no more gold (and presumably no more money).

Rather than end the war or allow the gold-dollar market to correct itself, Nixon panicked. Why? The 1972 elections were coming up soon, and he didn't want to lose. Hence, the Nixon Shock.

The Nixon Shock cut off the connection between the United States dollar and gold, ending the gold standard. The USD moved to a floating currency. This had tremendous aftereffects internationally, considering the United States unilaterally moved out of an international agreement. Unable to trade their current dollars for gold, international traders were not pleased, to say the least.

World leaders went along with Washington, and eventually agreed to a second version of Bretton Woods — this time with floating currencies, and with the USD as the key international currency. This last part (where the USD would serve as both the U.S. currency and as the de facto world currency) was debated and, despite opposition, passed.

The end result of these changes was a world economic system that allowed for a massive expansion of debt and credit, without the necessary backstops (limitations on gold, for example) necessary to prevent massive bubbles. The world has been on a roller coaster ever since.

After the Nixon Shock, the 1970s dealt with unemployment, stagnation, and inflation — a killer combination so new to the world that a new word (stagflation) had to be coined to explain it. The 1980s followed with recession, market highs, and more recession, followed by a boom and then a stock market crash in 1987. The 1990s saw another recession followed by another boom, this time the Internet bubble. The 2000s had another recession followed by a quick flash upward, followed by what seems to be the entire system finally crashing down on the world.

The world is now essentially mired in debt to itself, fueled by cheap money printed at whim and released upon an unsuspecting populace. Since Nixon's debacle, the middle class in America has declined in every measurable statistic, save one: debt. The wealthy have gotten obscenely wealthy and positioned themselves to pick up the pieces after every bubble pop.

None of these could have happened if Nixon hadn't unilaterally abandoned the gold standard while insisting the USD remain the world reserve currency. We would never have had such massive government debts, massive speculative bubbles, or massive expansion of imports (of cheap goods from other countries).

It's too bad that Nixon bothered to resign before he could be impeached for Watergate, because damning him for this offense seems more appropriate. He did, after all, manage to ruin the entire free world. Perhaps one could even call it the gold standard of politician shaming.

You can reach the author by email john@benzinga.com or on twitter @johndthorpe.

Posted-In: Gold Standard Richard NixonNews Movers & Shakers Politics Global Economics General Best of Benzinga

 

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