Anniversary: How Nixon the Keynesian Destroyed the Monetary Regime of Keynes

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It was 42 years ago today, on a Sunday, that President Richard Nixon went on television and announced to the American people that he was closing the gold window the next day and imposing full-scale price and wage controls on the American economy. He signed an executive order. Congress had nothing to say about it, and therefore said nothing.

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.

So, it would stabilize the dollar. This, from the man who told the media in November 1962, after his defeat for Governor of California, “You won’t have Dick Nixon to kick around any more.” If you want to see the decline of the dollar since 1971, click here.

Nixon unilaterally abolished the monetary agreement established in 1944 at Bretton Woods, New Hampshire. At that meeting, the United States, Great Britain, and other Western nations established a new monetary order. It would be supported by the United States Treasury. The United States Treasury would guarantee that any central bank or foreign government could buy gold from the Treasury at a price of $35 per ounce.

The goal of the Treasury was simple: to get foreign governments to hold Treasury debt instead of gold. Because Treasury debt was supposedly as good as gold, foreign governments and central banks could hold Treasury debt instead of holding gold. This enabled the United States government to run fiscal deficits, and foreign governments and central banks financed a portion of this debt. They did so by creating their own domestic currencies out of nothing, and then using these currencies to buy U.S. dollar-denominated debt, meaning U.S. Treasury debt. It was a nice arrangement. Foreign governments and foreign central banks gained an interest rate return on holding treasury debt, which they could not get by holding gold. Yet the dollars that they were being promised by the Treasury were supposedly as good as gold.

On August 15, 1971, Richard Nixon declared for all the world to hear that the dollar was not as good as gold. From that day forth, foreign governments and central banks could no longer get gold from the Treasury at a fixed price of $35 an ounce. Nixon broke the promise, and thereby opened the possibility of extensive monetary inflation by the Federal Reserve. From that point on, the Federal Reserve did not have to worry about the possibility that the price of gold would rise in private markets, and that central banks would find it profitable to buy Treasury gold at $35, and put it in their own vaults.

This had nothing to do with Americans. Americans could not legally own gold bullion in 1971. That did not become legal until January 1, 1975. So, the focus was on the foreign value of the dollar in relation to gold. That value had fallen, and so there was a run on the Treasury. Foreign central banks were demanding gold at $35 an ounce, which was why the price was being kept at this low rate. They could get the gold at $35 an ounce from the Treasury. But, in August 1971, it became clear to the Treasury secretary that this could not go on much longer. If the drain of gold reserves continued, within a few years, there would be no gold remaining at the Federal Reserve Bank of New York. Actually, the gold would have been there, but it would have been allocated to different owners. The United States government would have lost ownership.

It was this decision that made it possible for Arthur Burns and the Federal Reserve to expand the money supply rapidly, in order to overcome the Nixon recession. That recession was the worst one since the end of World War II. The federal government ran back-to-back deficits of $25 billion a year. In 1970 and 1971, this was considered a gigantic failure on the part of the federal government. Nobody had heard of such deficits ever since the end of World War II. How times have changed.

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