Closing the Gold Window: Remembering the Nixon Lie 40 Years Ago
(The New American) -- by Bob Adelmann --
Against the backdrop of price inflation reaching six percent, the unemployment rate touching five percent, the increasingly large holdings by foreign governments of dollars (that at the time were convertible into gold upon demand) and his desperate need to get reelected, in August, 1971 President Nixon conferred with his economic advisers about how to solve the inflation problem without taking any blame for it.
The meeting was precipitated by the demand from the British ambassador “who showed up at the Treasury Department to request that $3 billion [of paper dollars] be converted into gold. At that moment in time, the amount of “cover” — the amount of gold held in Fort Knox as a percentage of outstanding paper dollar claims against it — had declined from 55% to 22% — leaving the Treasury desperately close to default. The economic advisers surrounding Nixon knew that “shutting the gold window would weaken the dollar against other currencies, thus adding to inflation by driving up the price of imported goods,” but they moved ahead anyway. And so was born the Nixon lie, delivered just as the Asian markets were opening on Sunday night, August 15, 1971...
In essence, Nixon’s lie consisted of blaming “speculators” for their natural reaction to the increasing potential of being defrauded by the U.S. government — redeeming their paper for gold. The lie continued by suggesting that a weaker dollar is a stable dollar. The lie culminated in his arrogance in unilaterally moving to break that promise, with the consequences Americans are enjoying today. For once the link — tenuous though it was — was broken, any anchor the paper dollar had to real value was severed, unleashing a never-ending decline in the dollar’s purchasing power, and the resulting relentless and accelerating increase in prices.
For the first 175 years of the republic the price level remained relatively constant. But once the tie to gold was completely severed in 1971, the price level (as seen in the chart below) has increased six times in the past 40 years, with no expectation that such increases will cease...MORE...LINK