Happy 40th Birthday Gold-Free Dollar!
On August 15th, 1971, the dollar's final gold tether was severed, allowing it to sail away into uncharted seas.
Detlev Schlichter describes the significance of the move in the WSJ's Europe edition:
Forty years ago today, U.S. President Richard Nixon closed the gold window and ushered in, for the first time in human history, a global system of unconstrained paper money under full control of the state.
It is not that prior to August 15, 1971, there was a gold standard.
Far from it. Most countries had severed any direct link between their currencies and gold many years earlier. U.S. citizens were still prohibited by their own government from even holding gold privately.
Nevertheless, a tenuous link to gold still existed. Under new monetary arrangements after World War II, the dollar had become the global reserve currency and central banks around the world received a guarantee from the U.S. that they could exchange their dollar reserves for gold at a fixed price. But on this day in 1971, the United States defaulted on this promise and thereby removed the last impediment to the unconstrained production of fiat money. After the "Nixon shock," money everywhere became pure paper money—or, increasingly, electronic money—that could be created by privileged money producers—banks and central banks—practically without limit.
Lew Lehrman's piece on the WSJ's op-ed page goeson to describe the more tangible effects.
"The purchasing power of a dollar saved in 1971 under Nixon has today fallen to 18 pennies (see the nearby graph). Nixon's new economic policy sowed chaos for a decade. The nation and the world reaped the whirlwind," Lehrman writes.
That is bad enough. But it gets worse. I'd also mark down on the ledger of the gold-free dollar the rise of financial expertise and too big to fail Wall Street, government healthcare, and the bankruptcy of social security. The massive inflation that has wiped out the value of the dollar over forty years has made ordinary savings impossible.
It is now necessary to "save" by employing experts to provide investment strategies, often involving the exploitation of tax loopholes. In the process, a huge amount of wealth is transfered to the firms that employ investment advisors. At the same time, the inability to save makes social security and government health care subsidies all the more important.
Arguably, going off the gold standard pushed our economy even faster toward financialization, inequality, and government interventionism on behalf of the well-connected. But it didn't destroy the economy, as many thought it would. Hyper-inflation did not ensue. In fact, inflation has barely been a soft breeze since the days of Paul Volcker. We really did Whip Inflation Now, despite a dollar unmoored by anything but the policy preferences of central bankers.
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