Cryptocurrency: Celebrating 50+ years of Monetary Debasement and Debt That Politicians Put On Your Head

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How Nixon And FDR Used "Crises" To Destroy The Dollar's Links To Gold

https://mises.org/wire/how-nixon-and-fdr-used-crises-destroy-dollars-links-gold
https://mises.org/wire/brief-history-gold-standard-focus-united-states
https://mises.org/library/monetary-breakdown-west
https://www.presidency.ucsb.edu/documents/address-the-nation-outlining-new-economic-policy-the-challenge-peace
https://mises.org/wire/how-monetary-expansion-creates-income-and-wealth-inequality
https://wtfhappenedin1971.com/
https://mises.org/library/populist-case-gold-standard
https://www.infoplease.com/primary-sources/government/presidential-speeches/state-union-address-woodrow-wilson-december-2-1913
https://www.presidency.ucsb.edu/documents/executive-order-6102-requiring-gold-coin-gold-bullion-and-gold-certificates-be-delivered
https://www.presidency.ucsb.edu/documents/proclamation-2039-bank-holiday-march-6-9-1933-inclusive
https://mises.org/library/fed-and-ratchet-effect



Since August 15, 1971, the US dollar has been completely severed from
gold. President Richard Nixon suspended the most important component
of the Bretton Woods system, which had been in effect since the end of
World War II. Nixon announced that the US would no longer redeem
dollars for gold for the last remaining entities that could: foreign
governments. Gold redemption had been made illegal for everybody else,
so this action finally ended any semblance of a gold standard for the
US dollar.

In Crisis and Leviathan, Robert Higgs showed how in the twentieth
century the US government grew in size and scope primarily during
crisis periods like wars or economic depressions. The powers gained
during those periods were often advertised as “temporary,” but history
shows that governments rarely relinquish powers. This “ratchet effect”
applies to the way Nixon “temporarily” suspended gold redemption in
1971—the resulting regime of unbacked fiat dollars remains in effect
today.
What Was the Bretton Woods System?

The Bretton Woods system was designed by the Allied nations, led by
the United States, near the end of World War II as a postwar
international monetary order. The US dollar would become the world’s
reserve currency, which foreign governments could redeem for gold,
even though US citizens could not. This prohibition was not new for US
citizens, since Franklin D. Roosevelt outlawed private ownership of
gold coins and bullion in 1933.

To get foreign governments to join the agreement, the US promised to
redeem dollars for gold at $35 per ounce, which limited the extent to
which the supply of dollars could be expanded. International trade was
slow to restart after World War II, which meant that the Bretton Woods
system of gold exchange was not fully tested until the late 1950s.1
Yet, even by this time, US inflation meant that Japan and countries in
Western Europe were holding a reserve currency that was falling in
value, especially relative to the promised $35-per-ounce price of
gold.

The US could only use diplomatic pressure to slow the foreign
governments’ requests for gold redemption. Even so, the US lost about
55 percent of its stock of gold from the early 1950s to the end of the
Bretton Woods system in 1971.

In a last-ditch effort to maintain the Bretton Woods system in 1968,
the US tried to implement a “two-tier gold market” such that central
banks around the world would participate in one market that would seek
to keep the $35-per-ounce dollar-to-gold ratio, and would not buy or
sell in the other tier: the private, free gold market.

This, of course, quickly fell apart. By 1971, President Nixon could
not contain the effects of the monetary inflation used to pay for the
Vietnam War and Lyndon B. Johnson’s Great Society programs (including
Nixon’s own expansions). Amid a host of desperate interventions such
as new tariffs and wage and price controls, Nixon also “temporarily”
suspended gold convertibility. He sought to “protect the position of
the American dollar as a pillar of monetary stability around the
world.”

The dollar was completely severed from any commodity backing, making
it a purely fiat money. The Federal Reserve could now inflate without
any regard for redemption demands from private citizens, businesses,
foreign governments, or foreign central banks.
The Result: Inflation

Anyone should have been able to predict the consequences of this
event. A government with a ready buyer of debt in the form of an
unrestrained central bank can spend much more, since the
redistributive effects of inflation are less obvious than taxation.
Gold redemption was a strict limiting factor for the Fed—now the only
constraints are political and subjective, despite the appearance of
technical expertise at the Fed.

The threat of running out of gold has been replaced with the softer,
lagged-consequence question: “To what extent will voters tolerate
price increases and financial crises?” And even the negative political
consequences may be exploited via Cantillon effects by creating and
rewarding a chosen set of powerful, politically connected winners at
the expense of a less powerful, propagandized population of losers.

The consequences of the closure of the Bretton Woods system and the
remaining façade of sound money it represented are well documented.
Time series of almost any macroeconomic statistic show a “structural
break,” i.e., an abrupt change in the trajectory of the series, around
1971 or shortly after. A website with the tongue-in-cheek URL
WTFHappenedIn1971.com provides numerous such examples. Measures of
monetary inflation, price increases, inequality, financial crises,
saving rates, government spending, government size and scope,
social/cultural indicators, incarceration rates, and even meat
consumption and the number of lawyers all have inflection points in
the early 1970s.
Financial Crisis and Leviathan

Besides the economic consequences of unhinged central banks, we should
also understand the means by which the government was able to acquire
so much control over money. Looking at episodes like Woodrow Wilson’s
creation of the Federal Reserve, FDR’s confiscation of gold, and
Nixon’s cancellation of Bretton Woods, as well as all of the other
times the government chipped away at sound money, we notice a
commonality. Crises, real or merely perceived, are exploited each
time.

Wilson rode the wave of fear of financial panics and the concern for
farmers desperate for credit that had been stirred up by William
Jennings Bryan and other progressives. Wilson emphasized the “urgent
necessity that special provision be made also for facilitating the
credits needed by the farmers of the country” and painted an
apocalyptic picture of a world without his proposed banking system
reforms:

    I need not stop to tell you how fundamental to the life of the
Nation is the production of its food. Our thoughts may ordinarily be
concentrated upon the cities and the hives of industry, upon the cries
of the crowded market place and the clangor of the factory, but it is
from the quiet interspaces of the open valleys and the free hillsides
that we draw the sources of life and of prosperity, from the farm and
the ranch, from the forest and the mine. Without these every street
would be silent, every office deserted, every factory fallen into
disrepair.

FDR was the master of crisis exploitation. Executive Order 6102 begins this way:

    By virtue of the authority vested in me by Section 5 (b) of the
Act of October 6, 1917, as amended by Section 2 of the Act of March 9,
1933, entitled "An Act to provide relief in the existing national
emergency in banking, and for other purposes," in which amendatory Act
Congress declared that a serious emergency exists, I, Franklin D.
Roosevelt, President of the United States of America, do declare that
said national emergency still continues to exist and pursuant to said
section do hereby prohibit the hoarding of gold coin, gold bullion,
and gold certificates within the continental United States by
individuals, partnerships, associations and corporations.

Just one month earlier, FDR had mandated a bank holiday, suspending
all withdrawals of gold from banks. His proclamation cited a “national
emergency” due to “increasingly extensive speculative activity” and
“heavy and unwarranted withdrawals of gold and currency from our
banking institutions for the purpose of hoarding.”

Almost forty years later, we see speculators being used as scapegoats
again. In Nixon’s announcement, he accused “international money
speculators” of profiting off monetary crises and “waging an all-out
war on the American dollar” as if they were the ones causing the
volatility in foreign exchange markets and the wholesale drainage of
gold from the US, not the US government’s own irresponsible
profligacy.

In all of these episodes, the US presidents framed the power grab as a
necessary and sometimes temporary response to a crisis. Financial
panics, the threat of starvation, gold hoarders, and external
speculative attackers were all used as a basis and cover for doing
what governments have done for millennia: debasement, coin clipping,
and money printing for the purpose of surreptitious extraction of
wealth from a population.

Only the most naïve could see the history of money and banking in the
US as anything other than a ratchet of government growth, especially
in the twentieth century. Even recent Fed actions follow the same
pattern.
Conclusion

The Bretton Woods system was the last remaining vestige of the gold
standard. As weak as it was, it limited the Fed’s ability to expand
the supply of dollars due to the possibility of other governments
redeeming their dollars for gold. When Nixon suspended the key
component of the international agreement, he ushered in a new era of
central bank monetary policy unhindered by any promise to redeem
dollars for a certain weight of gold.

The economic and cultural consequences of this event have been
disastrous: even more inflation; exacerbated inequality via Cantillon
effects; more government, both in size and scope; higher rates of time
preference; severe financial crises and business cycles; and, of
course, higher prices.

The end of the Bretton Woods system followed the same pattern all
other episodes in the demise of the gold standard followed. A crisis
(real or just perceived) was exploited to announce a “temporary”
measure or an “essential reform” of the existing system. The bigger
picture shows a government that has finally gained 100 percent control
over money and banking in the form of unbacked fiat money issued by an
unrestrained central bank.