Exactly 40 years ago today, on August 15th 1971, the US dollar was released from the cruel tethers of an international gold standard. Today, we find notable monetary authorities seeking its return.
In the middle of a lengthy ~2,500 word speech in which Nixon sought to stabilize prices by implementing price controls and stabilize foreign trade by imposing tariffs, he slipped in these 100 words that sought to stabilize the dollar by going off the gold standard:
In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy – and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.
I have directed Secretary Connally to suspend temporarily the convertibility of the American dollar except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
It turns out that such intervention was actually counterproductive to the stated aims, so we are tempted to suspect that a different set of aims was met instead. Perhaps these included the aims of unchecked government spending without a pesky gold tether and reinforcement of the belief that poor monetary and fiscal decisions can be eliminated by decree.
If so, then these aims were also not met, at least not over the long haul.
Today we find that the US has trillions in unbacked dollar liabilities lurking in central bank reserve accounts across the globe, biding their time for the day they will eventually be repatriated. And it has a fiscal train wreck in its hands.
Such are the (very) predictable consequences of limiting the rate and amount of money printing and spending solely by people's self-discipline. It has never worked out in the past, and (our marvelous technology and sophistication aside) it’s not working out this time, either, for the obvious reason that humans are still humans. iPads and carbon-fiber bicycles do nothing to change that simple fact.
What have we seen in the 40 years since that fateful decision to ‘temporarily suspend’ gold convertibility for the dollar?
- GDP has advanced by 13.2 times
- Government expenditures have increased by 17.3 times
- Total credit market debt has increased by a whopping 31.0 times
- The US went from a net-export positive to deeply negative country
The continuation of these trends requires a complete absence of limits on dollar creation going forward. However, there are abundant signs today that such a future simply is not sustainable, virtually assuring that the prior 40 years will prove to be a historical anomaly.
So, happy 40th birthday US dollar.
Here’s hoping you make it to 50.