Nixon ends gold convertability

This piece of historical footage is quite amusing but also quite tragic in light of subsequent economic events in the 1970 and 1980s in particular. In it US President Nixon makes lots of promises that are without foundation and which ultimately floundered. The premise on which Nixon ended the Bretton Woods gold standard bears no correlation at all with the subsequent outcomes.

One of the consequences of this US reform was that quite quickly the US dollar lost it’s stature as a useful reference for stable value. In 1983 the Australian government conceded as much when it floated the Aussie dollar.

36 thoughts on “Nixon ends gold convertability

  1. Those dastardly “money speculators”. I’m sure relieved Nixon saved us from them, and brought about a period of economic stability from his reforms !

  2. I know Terje is obsessed by gold, but I’m not. Therefore I don’t see why decoupling the US dollar from gold is so important provided the dollar is freely tradeable. All the talk about imports and “unfair foreign competition” (does fair international competition exist?) are irrelevant when the value of the currency is free to rise and fall relative to other currencies.

  3. David,

    The gold standard is important because it prevents compulsory taxation through inflation, and makes government overspending far more obvious.

    Dollars should represent a relatively constant value, based not on a complicated international and domestic economic climate, but on the market value of a real liquid asset.

    Certainly the price of gold can jump around, but unlike a fiat currency, there is a physical limitation on how much exists in the earth’s crust.

    What would you think if:
    You walked into a casino and bought $50 worth of chips. You played your games and made a small profit, and returned to the counter to exchange your chips for money, only to discover that ‘due to inflation’ in the quantity of chips being issued, the casino will now only pay you $45 dollars for that quantity of chips… despite the fact you actually won the games!

    Who would visit that casino!? Not me, thats for certain.

    You claim you are a libertarian, so, naturally, I am interested to hear your arguments against the gold standard.

  4. Once fractional reserve begins the gold standard is doomed. The two are incompatible. But then once the gold standard is finally broken in its entirety the paper isn’t going to last forever either. Its just a situation of decades long corruption.

    Clearly to let one group of society (government and banks) practice what amounts to a counterfeiting racket is dishonourable and unsustainable. It is sustained only now by compulsion and in violation of the principle that we are all equal before the law.

    Hence loan contracts in gold cannot be enforced. The government stands ready to lend banks paper money but not gold coins, and just the other day the FBI raided the headquarters of the blokes who make the liberty dollar and seized a bunch of their coins. What drew great offence was that the coins had Ron Pauls head on them.

    Our paper retains its value only because of this thuggery and favouratism and in fact would not have any value at all were it not required for the payment of our taxes.

    As Ron Paul pointed out a ship with gold coins can sink and 500 years later the coins will retain their value. Yet if this paper money fell into the ocean no-one could get too excited about it. It falls in value maybe 5-10% per year despite official figures that only deal with consumer prices…. and they could print up more paper anyway.

    We’ve seen that this paper cannot survive forever and never has in the past. Look at the Americans. Variously quoted as being in debt to the tune of 9.6 trillion-13 trillion and getting into more hock by a trillion dollars every 15 months. Plus with unfunded liabilities 50-60 trillion. This is all to do with the ability of people to practice legalised counterfeiting.

    They are not paying this back. Hence the currency must collapse. They will go on borrowing more if the currency is losing value.

    So maybe the Feds were right to seize these Ron Paul coins. Right in terms of knowing what suits there own interests. But it would be better if this entire farce came to an end.

  5. David,

    What do you mean by freely tradeable in this context? I assume that you mean no capital controls but perhaps you mean something else. If you do mean that there should be no capital controls then I agree but I see this as a somewhat separate concern (although still significant).

    A monetary reform that entailed targeting the price level for an international basket of commodities (as Keynes proposed with the Bancor) would in my view be just as reasonable as a fix to gold. The gold standard is just a special case of the former.

    Regards,
    Terje.

  6. Valuable insights, graemebird.

    You hit the nail on the head. If no one was forced to pay debts and taxes in federal currency theres a good chance no one would use federal currency at all.

    And, I agree, the US dollar is headed for imminent collapse. When the T-bond market sours and the Chinese stop pumping money into the US economy the fed will be forced to purchase all the tbonds itself. It will do this with new money thus causing hyperinflation. And thats only one weak link; I am sure many others exist. The US economy, at this point, is virtually beyond saving.

  7. The gold standard is simply one approach to keeping inflation under control. But uncoupling the US dollar from gold only led to the inflation of the 1980s because there were too many limits on free trade (goods, services and currency).

    The current environment suggests the gold standard is not needed to keep inflation low so long as governments exercise fiscal restraint. I acknowledge governments can’t be relied on, but it’s not much different from ‘starving the beast’ with low taxation.

    It’s also not particularly libertarian. The link to gold is imposed by government fiat, as is any targeting method. The only genuinely libertarian option is private currency. I have no in-principle objections to that, but the world’s not ready for it.

  8. David,

    It’s more how the money supply is expanded – whether its by natural means (found out of the ground), or manipulated by a government (paper money, or reducing gold content of coins). One is honest, the other is not.

    I don’te believe anyone here is advocating the use of gold by government fiat. As you said, private currency is the way to go, but the history of currency would suggest a natural return to gold as a method of exchange.

  9. How is the world ‘not ready for private currency’. How can we be ‘not ready’ for something we’ve had before? An absurd proposition at best.

    The world is ready for freedom from fiat, freedom from taxation, and freedom form counterfeiting. It will always be ready for these freedoms, as a slave is always ready to be freed.

  10. “Once fractional reserve begins the gold standard is doomed. The two are incompatible. But then once the gold standard is finally broken in its entirety the paper isn’t going to last forever either. Its just a situation of decades long corruption.”

    No Graeme, you are just making this shit up. Please stop it. The post US civil war period to World War One was one unforseen econpmic expansion and macroeconomic stability.

    Only the second bloodiest war in history could end it.

    Free banking and the classical gold standard are probably the best monetary system we’ve had yet, excvept foir the free banking episode of Scotland.

  11. Mark,

    Graeme was obviously referring to fractional reserve banking as protected by a central bank owned by the government; that is: virtually the only manifestation of it we see in modern society.

    He is correct in his assessment.

    Heres some food for thought:
    The American experiment was to make the smallest, most tightly controlled, most self correcting and self limiting government in the history of the world.

    The result was the largest and most powerful empire in the world.

    Why?

    Because the free market had so long to prosper and generate so much wealth, that by the time the inevitable growth of the state caught up with it, it could feed off the nation’s incredible wealth and grow super massive.

    Even if you believe, in the face of all historic evidence, that the state can be tamed you must at least concede that giving it the unlimited ability to print money, and therefore the unlimited ability to tax by inflation, is a dire mistake, as is giving it the ability to take loans or sell bonds.

  12. “Graeme was obviously referring to fractional reserve banking as protected by a central bank owned by the government; that is: virtually the only manifestation of it we see in modern society.”

    You’d think so, but no.

  13. Look Mark. Have you actually got over your stubborness and learnt anything about monetary economnics since the last time you blundered in? Because you started off your pigheaded take on these matters without understanding how money is created and you still don’t know and thats a couple of years now.

    The fact is that fractional reserve and the Gold standard are incompatible. And when the two co-exist the Gold system is in the process of corrupting, being further regulated, and being broken down.

  14. David,

    Allowing private currency is certainly what libertarians should strive for. However even the most minamalist of taxes needs to be paid in some form proscribed as acceptable to the government. I think that denominating tax bills in a natural monetary commodity ultimately delivers greater price stability, transparency and a higher level of confidence in free markets because it sets the dominant unit of account in a way more sympathetic to free markets. Of course you could argue that inflation targeting via interest rate policy is better than targeting gold. I’d disagree but we already know that. I will concede that inflation targeting via interest rate policy is a heap better than the alternatives that we have tried since abandoning the gold standard. And I’ll accept that political support for monetary reform is currently close to non-existent in Australia.

    A return to the gold standard may not be a purely libertarian agenda however it tends to be an agenda promoted by libertarians more often than any other group. So in a libertarian context it remains topical.

    I reject your suggestion that the inflation of the 1970s and 1980s was due to a lack of international free trade. It was due to a lack of discipline in monetary policy which no amount of free trade will ever correct. The gold standard had previously ensured discipline in spite of a previous lack of free trade.

    Regards,
    Terje.

  15. Inflation targeting, if taken seriously, would lead to really severe monetary contractions. Since a recession happens when producer goods prices and assets prices have inflated and are out of whack with consumer goods prices. So they have to fall in relation to consumer goods prices. Or alternatively consumer goods prices must rise in relation to asset and producer goods prices.

    Therefore inflation targeting would have us slam on the monetary brakes right at the time the recession was beginning.

  16. I don’t think the gold standard is that important in itself, and it isn’t necessarily the only or the preferred method to achieve sound money.

    What you do need, is a free market in banking, and competitive currencies. Under that situation, banks would not practice fractional reserve lending, because their competitors would be able to raise a dispute and force them to declare bankruptcy if they cannot settle their payments at the end of a business day.

    As long as customers are free to choose banks that practice sound banking, with their deposit receipts backed up by reserves, the practice of fractional reserve banking will not survive, and you will not end up with inflationary credit creation.

    But the status quo of a central bank which forces a single currency on the population and allows banks to lend beyond their reserves, is what Rothbard calls a banking cartel.

  17. Most environments in which competitive private currencies have been allowed to prosper have entailed such currencies mostly still referencing a single common unit of account. Fixed exchange rates between most such private currencies is the free market norm. For instance in the free banking era in Australia prior to 1910 the vast majority of private bank currencies were ultimately denominated in gold and accepted and exchanged at face value by competitor banks. Effectively they all had a fixed exchange rate relative to eachother. And the unit of account the market choose to use was as usual the unit of account in which government business was primarily denominated (in this case the gold linked British pound sterling).

    Liberating the market to create private currency alternatives is a positive thing however it still does not avoid inflation if the government elects to debase it’s preferred unit of payment. The market will not abandon the governments prefered unit of account merely because it is declining in value. Market participants can not afford to so long as they have tax liabilities to pay. So the unit of account in which taxes are paid and government salaries and activities are paid is still of key importance. Only if the government willfully subordinates itself to the market by using a commodity currency can the market have any significant influence on maintaining price stability. Otherwise inflation continues to be dictated by the government.

  18. Whilst I support free exchange of the metals of your choice, we could still have a gold standard of comparison. Perhaps the government or county could issue its’ prices or services in gold gramme units, and that could be the official rate, with other metals compared to it. Just as I think we’ll all use metrics, since the metric system is now in place, so a unifying weight of currency will probably be a convenience that we’ll all adopt.

  19. “Look Mark. Have you actually got over your stubborness and learnt anything about monetary economnics since the last time you blundered in? Because you started off your pigheaded take on these matters without understanding how money is created and you still don’t know and thats a couple of years now.”

    Well Graeme, since you are now making up history to assert your claim that a gold standard and fractional banking are incompatible, perhaps you should take that as a kick in the guts since even with my “ignorance” I am right and you are deluded.

  20. Jono. How many competitive currencies are you looking at?

    Yes gold is not the be all and end all but the idea of having thousands of currencies, one for every bank almost is pretty implausible.

    Hayek came out with such an idea years after he had stopped talking about monetary and capital markets matters and its a really implausible idea that we can put down to the rush of blood to the head once a fellow gets the nobel prize.

    Nonetheless we have managed to get by with more than one hundred currencies and while its been a really messed-up system at least we’ve done it and are still alive.

    Which is why I would propose between six and a dozen monies worldwide. Because whereas in the past this might be a restraint of trade we have now the information-processing ability to handle maybe half a dozen fully-backed commodity monies.

    So we might look to what commodities the free market would likely take on and that would be gold, silver, copper and platinum.

    And then for government monies we might look to homogenisable, digitizable goods that have a security value.

    So that the Americans have their strategic oil reserve.

    We could have a bigger strategic fuel reserve than what the Americans have if it were one of our currencies.

    Standardised liquified-coal/diesel could be a money as could standardised refined uranium if this country were bristling with nuclear power plants.

    But even the smell of the memory of the toleration of fractional reserve would queer such a possibility and make it implausible.

  21. Graeme,

    Hundreds of currencies is not a problem if the market elects to have fixed exchange rates as it did in Australia pre 1910 when pretty much every bank issued it’s own currency. If the term “Australian dollar” was today defined in legal terms as 40 milligrams of gold and the government removed the regulatory barriers on private currencies and the government exited the currency business themselves then we would quickly have dozens of domestic currencies. However they would overwhelmingly be defined in terms of the redefined Australian dollar (40 milligrams of gold) and would exchange at fixed rates according to face value. We would not even need to modify accounting software.

    What would be a problems is dozens of “units of account”. The world wants a single unit of account for common book keeping, contracts and commerce. One hundred years ago (with the exception of China) the world used one such single unit of account. We had one world with one near integrated economy using one unit of measure.

    As for the commodity of choise the company that created e-gold also offers e-silver, e-platinum and e-palladium and has done for many years. The market seems to have gone with gold while all the others have very negligible levels of liquidity.

    Regards,
    Terje.

  22. Well you might be able to have thousands of currencies but it would be an economic loss. I would argue that these banknotes reflected a single currency. That is to say GOLD and the problem with that system wasn’t multiple currencies but simply the fractional reserve practice which lead to the fractional reserve business cycle and to political-moral-hazard and political intervention. But there we were really talking about one currency.

    Now you say that gold beats out all others in this e-gold stakes. But one wonders how things will pan out when you are trying to replace all the money. So we’d want to keep an open mind about this.

    For example if we were replacing all the currency for electronic transactions gold may have some advantage. But how about for paying in coins? Silver would likely have great advantages over gold.

    Then there is the issue of wanting a strategic fuel reserve. Because the government has to decide what it wishes to be paid in. And it might be advantageous, so long as the crap fiat money is being readily replaced by gold and silver, to have people pay them in a currency 100% backed by such a fuel.

    It just seems a bit odd to me having the entire money supply in gold and bidding the gold price up too far. And if people come up with that objection I would say that it doesn’t need to be all Gold and it likely won’t be all gold.

    I suspect silver will do very well and I suggest that even a libertarian government does have some leeway here as to what it wishes to be paid in.

    I suspect that we would be better off with at least 3 monies and one of them a generic fuel like liquified coal would be good.

    If you are at war and both sides still have the men and materiel than the side that runs out of fuel first is going to be the loser. The sort of people we would have trouble with would likely be able to obstruct our trade.

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  30. Well you might be able to have thousands of currencies but it would be an economic loss. I would argue that these banknotes reflected a single currency. That is to say GOLD and the problem with that system wasn’t multiple currencies but simply the fractional reserve practice which lead to the fractional reserve business cycle and to political-moral-hazard and political intervention. But there we were really talking about one currency.

    ———

    Either no reserve or 100% reserve. What’s your choice Graeme?

  31. Graeme is being deceitful. There is no such thing as the “fractional reserve business cycle”. Not in Austrian economics anyway, which he purports to be a scholar therof.

    There is an Austrian Business Cycle, based on credit mispricing, but this is another thing altogether.

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