Cryptocurrency: Great Keynesian Coup Of August 1971: Fifty Years Later

grarpamp grarpamp at
Thu Aug 12 03:18:17 PDT 2021

The Great Keynesian Coup Of August 1971: Fifty Years Later
by William Anderson via The Mises Institute

On August 15, 1971, the last remains of what had been a magnificent
monetary system died a terrible death, and the American academic,
political, business, and media elites led the cheers. The Dow Jones
Average jumped by more than 32 points the next day. A de facto
national default was spun as a great liberation from a tyrannical
financial arrangement that had plagued humanity for generations.

A half century later the disinformation continues, as intellectual
bankruptcy parallels the financial bankruptcy of that event.

I write, of course, of the decision by President Richard Nixon to
officially close the “gold window,” through which the US government
was obligated to sell its gold stores to foreign governments at $35 an
ounce, which even then was a bargain. As Nixon’s regime encouraged the
Federal Reserve System to inflate the dollar to pay for its bloated
military and welfare spending, as had the Johnson and Kennedy regimes
before him, it became apparent that the US dollar was quickly losing
value. The United States was in rapid decline—and the dollar was
falling with the nation’s prestige.

What happened? There are several accounts, and I will give the main
ones, ending with the Austrian perspective. The first will be the
Keynesian, the second the monetarist (Chicago school), the third the
supply-side version, and the fourth from the Austrians. Before doing
that, however, I will give a brief account of the events that began
with the Bretton Woods Conference in 1944 and ended in national
disgrace, an ignominy that even now the official American narrative
refuses to recognize.

The Bretton Woods Conference didn’t occur in a vacuum. Just a month
before, Allied troops had secured a beachhead in France and had begun
to slowly push the German army eastward. Across the European
continent, armies from the Soviet Union were slowly destroying the
Axis forces from the other direction. In the Pacific, US bombers were
beginning to lay waste to Japanese cities, and the Japanese armies
were suffering defeat after defeat. Final victory for the USA and its
allies would not come for another thirteen months, but even in July
1944, it was clear how the war would end.

The US State Department explains the stated purpose of the conference:
to help reestablish trading relations in the postwar world:

    The lessons taken by U.S. policymakers from the interwar period
informed the institutions created at the conference. Officials such as
President Franklin D. Roosevelt and Secretary of State Cordell Hull
were adherents of the Wilsonian belief that free trade not only
promoted international prosperity, but also international peace. The
experience of the 1930s certainly suggested as much. The policies
adopted by governments to combat the Great Depression—high tariff
barriers, competitive currency devaluations, discriminatory trading
blocs—had contributed to creating an unstable international
environment without improving the economic situation. This experience
led international leaders to conclude that economic cooperation was
the only way to achieve both peace and prosperity, at home and abroad.

Some cynicism can be excused if one sees a disconnect between the
high-minded rhetoric of the document and the actual policies of the
Wilson and Roosevelt administrations that played a major role in
creating the calamities from 1917 to the end of World War II. But
then, it is a rare occurrence when government bombast and the truth
intersect. Not surprisingly, Bretton Woods was an attempt by
governments to deal with the previous disastrous results of
intervention by imposing even more intervention.

In his classic What Has Government Done to Our Money, Murray N.
Rothbard (who will figure heavily in my interpretation of the August
15 events) describes the Bretton Woods Agreement:

    While the Bretton Woods system worked far better than the disaster
of the 1930s, it worked only as another inflationary recrudescence of
the gold-exchange standard of the 1920s and—like the 1920s—the system
lived only on borrowed time.

    The new system was essentially the gold-exchange standard of the
1920s but with the dollar rudely displacing the British pound as one
of the “key currencies.” Now the dollar, valued at 1/35 of a gold
ounce, was to be the only key currency. The other difference from the
1920s was that the dollar was no longer redeemable in gold to American
citizens; instead, the 1930’s system was continued, with the dollar
redeemable in gold only to foreign governments and their Central
Banks. No private individuals, only governments, were to be allowed
the privilege of redeeming dollars in the world gold currency. In the
Bretton Woods system, the United States pyramided dollars (in paper
money and in bank deposits) on top of gold, in which dollars could be
redeemed by foreign governments; while all other governments held
dollars as their basic reserve and pyramided their currency on top of
dollars. (p. 99)

To put it another way, the Bretton Woods Agreement really was a scheme
to give the appearance of “sound money” all the while ensuring that
the sound money regime that existed prior to the outbreak of World War
I would not be reinstituted. Furthermore, Henry Hazlitt, who then was
writing editorials for the New York Times (how the mighty have
fallen!), saw through everything and predicted that the new monetary
arrangements would lead to disastrous consequences. He wrote:

    The greatest single contribution the United States could make to
world currency stability after the war is to announce its
determination to stabilize its own currency. It will incidentally help
us, of course, if other nations as well return to the gold standard.
They will do it, however, only to the extent that they recognize that
they are doing it not primarily as a favor to us but to themselves.

But Hazlitt knew that governments in 1944 were institutionally
incapable of returning to sound money and that the elites in
government, academe, and the media were hostile to anything but fiat
money. Ultimately, Hazlitt and the NYT would part ways over his
disagreements with the Keynesian economic views of the era. The NYT
would continue to endorse monetary socialism and today features Paul
Krugman, who has all but endorsed the money printing of modern
monetary theory. In other words, Hazlitt predicted the demise of the
Bretton Woods accord twenty-seven years before it officially

As previously noted, the US dollar was set as the world’s “reserve”
currency and it was set at $35 per ounce of gold, which meant that
foreign governments and central banks could purchase US gold at that
price if they wished to redeem their dollars on something other than
dollar-denominated goods and assets. Rothbard points out that because
the agreements set the currency exchange values at prewar levels, the
dollar was undervalued and European currencies overvalued, thus
increasing the demand for dollars.

(For reasons of length, I do not cover the Marshall Plan and how
international monetary policies fit into trying to make it work.
Suffice it to say the Marshall Plan has been given far too much credit
for Europe’s postwar recovery. In many instances, it actually impeded
recovery and it was only after the governments of Western European
nations eased the economic controls set during Nazi occupations that
Europe had a true economic recovery.)

The purposeful devaluing of the US dollar provided incentives for the
Federal Reserve System to inflate the dollar, which it did in the
postwar years and beyond (and is doing with a vengeance today).
Because the law forbade Americans from buying and owning gold (with
some exceptions for jewelry and official coin collections), the US
government did not have to worry about its inflationary policies
creating a domestic run on its gold reserves. That would not be the
case overseas, however.

American economists and politicians embraced Keynesian theories that
emphasized expansive government programs financed through deficit
spending. The few dissenters such as economists Ludwig von Mises and
F.A. Hayek were dismissed as “mossbacks” and “reactionaries,” as the
American media, academic, and political establishments saw the New
Economics as a gateway to easy prosperity.

European governments, and especially the French government led by
Charles de Gaulle (who was advised by the classical gold-standard
economist Jacques Rueff), by the 1960s began to purchase US gold in
earnest. In the early postwar years, it made sense to hold officially
undervalued dollars, but in less than two decades, the dollar had
become hopelessly overvalued relative to most European currencies.
Lyndon Johnson’s Vietnam war and his Great Society welfare programs
had to be financed, and the government chose inflation. Buying US gold
at what was a bargain price was a way that foreign governments could
do an end run around a monetary exchange system that was becoming
increasingly unbalanced.

In 1968, the US government tried to put together a stopgap measure to
stop the gold hemorrhage. (Rothbard goes into the details of the
measures, noting that they were doomed to fail because they were based
upon faulty economic analysis.) By trying to sever the link between
the US dollar and gold sold on the free market, the Johnson
administration claimed that the new measures would force down the
price of gold to less than $35 an ounce, making US stores an
unattractive buy.

As any competent Austrian economist would predict, however, the runs
on US gold did not diminish but rather intensified, and by the summer
of 1971, the US economy was stagnant, prices were rising, and
President Nixon on August 15 announced his “Phase One” economic plan
of price controls and temporarily closing the gold window. Again, any
competent economist would know that this move would end in failure,
but the move initially was popular in the media and with the public.
Gene Healy writes:

    There was no national emergency in the summer of ’71: unemployment
stood at 6 percent…. Yet, after Nixon’s announcement, the markets
rallied, the press swooned, and, even though his speech pre‐empted the
popular Western Bonanza, the people loved it, too—75 percent backed
the plan in polls.

On the monetary side, the next step was the implementation in December
of the Smithsonian Agreement, which raised the official price of US
government gold to $38 an ounce and allowed some flexibility in the
fixed exchange rates, but in the end, the combination of US inflation
and economic stagnation on the home front would lead to the total
collapse of fixed rates. By 1973, the dollar was hopelessly overvalued
and ultimately the present system of floating exchange rates
Keynesian Policies

One of the most famous statements to come from this episode of “Nixon
Shock” was the president’s statement to his advisers, “We are all
Keynesians now.” It also was the most accurate statement anyone in the
government would make. In one action, Nixon cut ties to gold, what
J.M. Keynes had called “that barbarous relic.” The devaluation of the
dollar would help exports, and Nixon saw government intervention as
necessary to “balance power” between labor unions and corporations.

In fact, his Federal Reserve chairman, Arthur Burns, already had
announced his fealty to Keynesian economics, and Nixon himself had
surrendered any previous notions of free markets to Keynesian-inspired
policies. The PBS Commanding Heights series reported:

    [W]hatever the effects of the Vietnam War on the national
consensus in the 1960s, confidence had risen in the ability of
government to manage the economy and to reach out to solve big social
problems through such programs as the War on Poverty. Nixon shared in
these beliefs, at least in part. “Now I am a Keynesian,” he declared
in January 1971—leaving his aides to draft replies to the angry
letters that flowed into the White House from conservative supporters.
He introduced a Keynesian “full employment” budget, which provided for
deficit spending to reduce unemployment. A Republican congressman from
Illinois told Nixon that he would reluctantly support the president's
budget, “but I'm going to have to burn up a lot of old speeches
denouncing deficit spending.” To this Nixon replied, “I'm in the same

Whatever fiscal discipline Nixon had promised during his political
campaign was out the window. Even if his enemies in the academic and
political worlds (and they were legion) would always hate him,
nonetheless he was giving them what they always had wanted: government
control of the economy. Not surprisingly, while his policies were
politically popular at the beginning, the 1970s ultimately became
known for stagflation (simultaneous increases in unemployment and
inflation—something Keynesians claimed was impossible), gasoline and
natural gas shortages (due to price controls), and a general feeling
of despair.

Democrats ultimately would drive Nixon from office three years later,
but they endorsed his economic policies, and especially his penchant
for price controls. President Jimmy Carter would push his wage-price
“guidelines” in an unsuccessful attempt to bring down double-digit
inflation, and when Senator Ted Kennedy ran for the Democratic
nomination in 1980, he made price controls the centerpiece of his
economic policies.

Ironically, Carter and the Democrats did embark on a supply-side
venture of their own, deregulating the financial and transportation
sectors and laying the groundwork to deregulate telecommunications.
Thus, the party of the New Deal actually undid part of the legacy of
Franklin Roosevelt—and actually provided a long-run boost to the
economy, all the while being ignorant of their accomplishments.

While the group of economists that called themselves supply-siders
raised important issues about how government intervention into the
economy was causing stagflation and other economic ills, nonetheless
their statements on Nixon’s actions were shortsighted. During the 1980
presidential campaign in which Ronald Reagan cast his lot with
supply-side economics, Jack Kemp, who championed the supply-side
policies in Congress, declared that Nixon’s error had been to go to
floating exchange rates instead of holding to the fixed rates of the
Bretton Woods accord.

Nixon’s actions, as dishonest as they were, did not occur in a vacuum.
Holding to fixed exchanged rates and a (very) modified gold standard
would have required the kind of fiscal and monetary discipline that
had not existed in Washington since the Great Depression and certainly
was not going to begin in August 1971. We should be clear: Nixon did
not unilaterally destroy a productive arrangement. Nixon’s actions
unwittingly exposed the bankruptcy of US government policies even
though he would spin it as the US fending off an unjustified foreign
attack on the dollar and on US gold supplies.

During the era of the international gold standard that fell apart in
1914, currency rates were fixed, but not against each other but rather
to a measure of gold. Any attempts to game the system—as the US
government did on a regular basis in the postwar years—would have
quickly been detected, with gold outflows ultimately helping to
counter cheating. Although the Bretton Woods accord was created to
emulate the old gold standard with its fixed rates, it ultimately
failed because governments are destructive. By summer’s end of 1914,
the governments of Europe had gone to war and destroyed an
international gold standard that took decades to build. In 1971,
governments armed with Keynesian dogma laid waste to an economic
system almost as surely as the Guns of August brought Western
civilization to its knees.

When Nixon announced the imposition of wage and price controls, Milton
Friedman of the University of Chicago loudly denounced them as an
“utter failure.” However, as Rothbard wrote, Friedman was not unhappy
to see the last ties of the dollar to gold broken. As an outspoken
advocate of floating fiat exchange rates, Friedman for years had
denounced gold ties to the dollar, as Rothbard explains:

    Since the United States went completely off gold in August 1971
and established the Friedmanite fluctuating fiat system in March 1973,
the United States and the world have suffered the most intense and
most sustained bout of peacetime inflation in the history of the
world. It should be clear by now that this is scarcely a coincidence.
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 to its nonmonetary 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. Since 1971, the market price of
gold has never been below the old fixed price of $35 an ounce, and has
almost always been enormously higher. (pp. 109–10)

In Friedman’s defense, the floating exchange rates didn’t cause the
inflation of the 1970s. However, those floating rates imposed no
financial discipline on the US government, and when things went south
presidential administrations blamed foreign governments. When the
dollar fell against European currencies in 1978, President Carter
signed off on a scheme in which the Federal Reserve System underwrote
a massive purchase of dollars in order to prop up the currency. Not
surprisingly, the arrangement failed to strengthen the dollar over

While Keynesians and monetarists might look down on gold as money (or
any monetary ties to gold), Austrians are not afraid to face the
ridicule from elites. More than anyone else, however, Austrians such
as Rothbard understood completely what was happening in 1971, and they
were not fooled by the government’s various monetary tricks as were
others. Rothbard writes:

    All pro-paper economists, from Keynesians to Friedmanites, were
now confident that gold would disappear from the international
monetary system; cut off from its “support” by the dollar, these
economists all confidently predicted, the free-market gold price would
soon fall below $35 an ounce, and even down to the estimated
“industrial” nonmonetary gold price of $10 an ounce. Instead, the free
price of gold, never below $35, had been steadily above $35, and by
early 1973 had climbed to around $125 an ounce, a figure that no
pro-paper economist would have thought possible as recently as a year

    Far from establishing a permanent new monetary system, the
two-tier gold market only bought a few years of time; American
inflation and deficits continued. Eurodollars accumulated rapidly,
gold continued to flow outward, and the higher free-market price of
gold simply revealed the accelerated loss of world confidence in the
dollar. (pp. 104–05)

The American economy and the dollar rebounded during the 1980s in part
because of lower tax rates and in part because of the deregulatory
efforts instituted by the Carter administration. Unfortunately, the
favorable economic conditions did not lead to fiscal soundness, but,
instead, seemed to encourage even more reckless behavior in
Washington. For the last twenty-two years, the economy has seen one
financial bubble after another: first the tech bubble of the late
1990s, then the housing bubble that burst in 2008, and now a
combination of housing and equities seems to be rising well out of
synch with market fundamentals.

As they did in 1971, the elite economists of our day are the
cheerleaders for fiscal foolishness. Lest one believe I am
exaggerating, this is from a recent column by Paul Krugman in the New
York Times, which lost its way editorially after the editorial
leadership pushed out Henry Hazlitt. Endorsing the so-called
Infrastructure Bill, Krugman writes:

    Imagine, to use a round number, that the federal government were
to go out right now and borrow $1 trillion—and that it were to do so
without making any provisions for servicing the additional debt. That
is, it wouldn’t raise any taxes or cut any spending to pay off the
principal; it wouldn’t even do anything to cover interest payments,
simply borrowing more money as interest came due.

    Under these circumstances the debt would grow over time. But it
wouldn’t grow very fast: The current interest rate on long-term U.S.
debt is less than 1.2 percent, so after a decade the debt would have
risen only about 13 percent.

    And debt growth would be vastly outpaced by growth in the economy:
The Congressional Budget Office projects a 50 percent rise in dollar
G.D.P. over the next 10 years. Debt wouldn’t snowball; relative to the
economy, it would melt.

    So the fact that the infrastructure bill would, in practice, pay
for public investment with borrowed money isn’t anything to worry
about. If the investment is worth undertaking—and it is—we should just
do it.

One can imagine that Krugman would have championed Nixon’s moves, from
abrogating the Bretton Woods Agreement to imposing wage and price
controls. To a Keynesian like Krugman and those that came before him,
the economy works best when governments spend recklessly with no

Austrians know better. The collapse of the monetary order in 1971
reflected the massive dislocations and malinvestment of resources that
ultimately turned the decade into one crisis after another, and the
current economy is facing risks of even greater magnitude.
Unfortunately, Keynesians rule the day, just as they did fifty years
ago. As Charles-Maurice de Talleyrand wrote of the Bourbons in the
years after the French Revolution, “They learned nothing, and they
forgot nothing.” One can say the same for the Keynesians. A half
century after The Crisis, Keynesians seem hellbent on creating new
crises and printing money to “fix” them.

More information about the cypherpunks mailing list