August 15 marks the 40th anniversary of the United States’ abandonment of the last vestiges of the gold standard (actually a gold-exchange standard under the Bretton Woods system ratified by Congress in 1945 or, as Gary North describes it in a LewRockwell.com column on the subject, a “government promise standard.”).
In President Richard Nixon’s address to the nation on that fateful day in 1971, where he compounded his economic error by imposing wage and price controls and a 10% tariff on imported goods, he announced:
I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary [John] 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 interests of monetary stability and in the best interests of the United States.
(See a video clip of Tricky Dick’s address on the Monday edition of CNBC’s “The Kudlow Report” here.)
Note that the “speculators” were blamed for the nation’s economic ills—just as they were during the financial and housing crisis of 2008 and the European debt crisis now—rather than unsustainable central bank credit expansions and government spending. Note also that this government directive was purportedly a temporary measure. Now where have we heard that before?
The Bretton Woods system was not a classical gold standard, so it ultimately proved to be unsustainable (see this Mises.org article by Robert P. Murphy for a concise description of the Bretton Woods system and its shortcomings), but the fiat (paper) money system that replaced it was destined to be even worse. Freed of any constraints on printing ever more money out of thin air, the United States, through the Federal Reserve, has run the printing presses with impunity (as has the rest of the world), resulting in higher inflation and an even more rapid devaluation of the currency.
As Lewis E. Lehrman notes in his Wall Street Journal article today, the dollar has lost 82% of its purchasing power since the government abandoned the Bretton Woods system (see the chart from the article below).
The economy has also suffered in terms of inflation, economic growth, and unemployment since going to a pure fiat money system.
Macroeconomic Data, Annual Averages During and After the Bretton Woods System
|
|
Bretton Woods (1947-1971) |
Post-Bretton Woods (1971-2011) |
|
Consumer Price Index |
2.5% |
4.4% |
|
Real Gross Domestic Product |
3.9% |
2.8% |
|
Unemployment |
4.7% |
6.3% |
Source: “The Kudlow Report,” CNBC, August 15, 2011.
This is exactly the opposite of what the Keynesian economists predicted, but precisely what those of the Austrian School of economics expected. As the famed Austrian economist Murray Rothbard related in his book What Has Government Done to Our Money?,
Before the dollar was cut loose from gold, Keynesians and Friedmanites, each in their own way devoted to fiat paper money, confidently predicted that when fiat money was established, the market price of gold would fall promptly [from $35 an ounce] to its non-monetary level, then estimated at about $8 an ounce. In their scorn of gold, both groups maintained that it was the mighty dollar that was propping up the price of gold, and not vice versa.
The reality? Gold climbed to about $800 an ounce within a decade. Oops. Oh well, the Keynesians and Friedmanites were only off by a factor of 100!
Rothbard explains why this was the case:
When a currency changes its character from gold-receipt to fiat paper, confidence in its stability and quality is shaken, and demand for it declines. Furthermore, now that it is cut off from gold, its far greater quantity relative to its former gold backing now becomes evident. With a supply greater than gold and a lower demand, its purchasing-power, and hence its exchange rate, quickly depreciate in relation to gold. And since government is inherently inflationary, it will keep depreciating as time goes on.
Politicians hate the gold standard because it prevents them from supporting unsustainable spending habits by printing money to pay off ever-expanding debts and passing off the costs to unsuspecting taxpayers through the hidden tax of inflation. A true free market in money would also negate the need for a central bank monopoly and all the machinations it uses to expand credit and create volatile asset bubbles and excessively painful corrections. This is why the gold standard is said to be critical to preserving freedom, and why the Fed’s expansion of its balance sheet by trillions of dollars in recent years is so alarming. The surest way to put an end to government manipulations of the monetary system and get the economy on a healthy growth path once again is to return to a classical gold standard because the only money “as good as gold” is gold.
See also this post on the 40th anniversary of the end of the Bretton Woods gold-exchange standard by my Reason colleague, Ronald Bailey.