On Friday, August 13, 1971, President Richard Nixon ventured to Camp David for a clandestine policy meeting with the chairman of the Federal Reserve, his Treasury Secretary, and several additional top White House officials. Nixon and his cohorts agreed that the Bretton Woods system (which guaranteed a fixed exchange rate for dollar to gold convertibility) was harming the value of the dollar, and they planned to blow the whole thing to smithereens.
He declared [emphasis added in bold]:
The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world. In the past 7 years, there has been an average of one international monetary crisis every year… 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. Now, what is this action—which is very technical—what does it mean for you? Let me lay to rest the bugaboo of what is called devaluation. If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to stabilize the dollar.
Nixon and his advisers were central planners through and through, and they did not predict or care for the unequal wealth distribution that would occur as a result of turning the dollar into a full blown fiat currency. Unsurprisingly, they failed to fix the American economy through their top down firebomb against the gold standard.
I encourage you to go to wtfhappenedin1971.com and familiarize yourself with the devastating financial ramifications of the Nixon Administration policy, in which a misguided protectionist gambit turned good money into bad money. Second only to the installation of the Federal Reserve System, the dollar’s departure from gold imposed countless negative economic and societal consequences for the vast majority of Americans. Here’s a couple charts from the aforementioned website to drive the point home:
As Milton Friedman once quipped, “Nothing is so permanent as a temporary government program.” That supposed temporary suspension remains in place today.
In the name of “protecting” and “stabilizing” the dollar, Nixon and his colleagues transformed the dollar into a money that is guaranteed only by decree, and imposed a broken incentive structure upon the greater system that rewards those closest to the money printer (people who are already wealthy and powerful), and punishes the rest of us.
Should the U.S. go back to a gold standard today?
Well, the issue with gold today is that most gold on the market is not gold at all. The paper (IOU) markets control the price of gold, which makes it difficult to value the precious metal accurately.
With the 2008 invention of Bitcoin, gold became an inferior money, and I believe that in the coming months, years, and decades, markets will recognize bitcoin as a global reserve currency. The long timeline of monetary history shows us that there is no room for a second best money when a superior currency exists.
In short, Nixon created a lot of chaos when in 1971, he and his cohorts detonated a monetary bomb that is still being felt today. The dollar went from good money to bad money, and although it is the king of fiat, its purchasing power will continue to decline over time.
Nixon’s pledge that the “dollar will be worth just as much tomorrow as it is today” couldn’t have been more wrong.