Sly Dicky’s disaster
Richard “Sly Dicky” Nixon, on the advice of Milton’s “Free Choice” Friedman, decided to end the convertibility of gold. He claimed that this was temporary, but his edict was a shameful default on the part of the US government.
My God, I wish that we, the people, did not grant such power to the government!
Keith Weiner, Founder, Monetary Metals
The power to spoil money is the Power of the One Ring. How can people not see this? Those who, like Boromir, use him “to make us stronger” or, like Boromir’s father, Denethor, “only in a pinch of need,” are mistaken. As Gandalf explains to Frodo, this Power is useless.
No, Boromir, this does not strengthen the economy. No, Denethor, it doesn’t stimulate recovery.
A Brief History of Bad Decisions That Lead to Nixon’s Really Bad Decision
Nixon’s bad political decision came after a long series of bad political decisions beginning in 1792. The Coinage Act of that year set the price of silver to gold at 15 units of silver to 1 unit of gold. In global markets, however, the ratio was closer to 15.5 to 1. A fixation of silver to gold at a lower level meant that gold was cheaper in terms of silver. The law revalued silver as American money and bank deposits, giving silver holders free purchasing power.
Obviously, if Paul gets something for nothing, then Peter shouldn’t get anything for anything. At least it should be obvious.
Gresham’s Law states that if silver is overvalued as money and gold is undervalued, then silver will enter circulation and gold will be stockpiled or exported. Although the US was officially bimetallic, the de facto used was the silver standard.
Then, in 1834, a new law changed the ratio to 16 to 1. This law lowered the value of silver, and America effectively switched to the gold standard. This change transferred wealth from the owners of the silver to the owners of the gold. The former were usually farmers and artisans who kept silver at home. The latter, as a rule, were rich, keeping gold in banks. Obviously, the latter turned out to be more effective in lobbying.
Then, in 1861, the government announced that paper money could not be exchanged for precious metals. In 1862, the government issued the later infamous dollars, and in 1863 banks with federal statutes (even in the 19th century it was impossible to simply open a bank, like any other type of business, special permission was required) could issue non-returnable bills. They were declared legal tender, which means that creditors had to either accept them or refuse to pay them altogether.
No one will exchange valuable goods or his labor for irrecoverable securities unless his creditors are forced to accept them as payment of his debts. The ultimate victim of irrecoverable currency is the person lending out their savings. He expects to be refunded on the same terms, but irrecoverable securities are constantly in a slow process of changing conditions, that is, sliding towards default.
Coinage Act 1873
After the Civil War, the government resumed paying hardcoins, but they seized the opportunity to do some more harm. The Coinage Act of 1873 effectively demonetized silver. Farmers and artisans suffered further losses from their silver and now had to pay their debts in gold.
The 1973 Crime was still on the minds of the people in the 1896 election. William Jennings Brian ran against William McKinley. Brian wanted to go back to the bimetallic system. McKinley was a proponent of the gold standard. McKinley won.
Federal Reserve Act of 1913
But Brian didn’t leave quietly. He resurfaced in the administration of President Woodrow Wilson, playing an important role in the passage of the Federal Reserve Act in 1913. Farmers and smallholders took revenge. If they could not relieve their debt burden by resuming minting silver coins, they thought they could do so by giving the government a monopoly on the issue of currency.
The stated reason for the creation of the Federal Reserve System was not inflation or unemployment. These problems turned into monsters only later (unemployment after 1929 and inflation after World War II). The Fed was allegedly created to stabilize the economy. The actual result, of course, was the destabilization of the economy.
The interest rate first rose and then fell. The Fed, being the lender of last resort, has seduced banks to speculate on this moral hazard. The fall in interest rates allowed them to get a cheaper loan.
Executive Order 6102
Then the raids on banks began, as they fell into disrepair. The banks went bankrupt, so President Roosevelt made another of those bad decisions from the sad series that ruined the money. He declared the possession of gold a crime and annulled all clauses of the contract requiring payment in gold (with the exception of foreign governments). Likewise, the most conservative investors were forced to buy government bonds.
Bretton Woods system
At the end of World War II, the Bretton Woods Conference was another bad political decision. As a result, a monetary system was introduced in which other countries treated the US dollar like gold. Everyone assumed, and above all US government officials, that this system was in the interests of the United States. In fact, she was designed by Harry Dexter White, who was later revealed to be a spy for the Soviet Union. There is hardly a better way to destroy America than a monetary system that will please America the way a heroin addict loves. In the end, the drug kills the addict.
The Allied Powers (and later the former Axis Powers) were unable to argue with the terms dictated by the world’s only superpower. However, they soon began to exchange their dollars for gold. It is known that France brought a warship into New York harbor, unloaded pallets of paper bills and loaded pallets of gold bars.
They took the nationalized gold held by the US government. Most of this gold was stolen from the American people by the Roosevelt government in 1933. Then – and now – it was believed that when the government had gold, it somehow benefited the people.
Based on this belief, it was not difficult to sell the idea that Nixon’s gold default benefited the American people. This is why Nixon defaulted in a shameful way! He also unleashed the inflationary hell that bankrupted Americans. It took – and it takes – a whole bunch of court economists to sell inflation. Otherwise, people would not believe in the supposed merits of monetary debauchery.
Nixon did not think about the welfare of the American people. He just didn’t want to raise interest rates ahead of an election that would cause a recession and make him lose.
Higher rates would satisfy foreign governments and keep their dollars. When the rates are too low, people withdraw their gold deposits. It was the same with foreign governments.
The crisis was that America’s socialized gold was dwindling.
Ideas that led to the Nixon shock
The concept of collectivism is essential to understanding this problem. By 1971, people had long recognized that money was too important to be trusted by people who were free to make their own decisions. They concluded that the money should be injected by the government and properly planned by the central banks. For some reason, they believed that they were completely independent of politics.
Either way, court economists sold the idea that central planning is scientific and the market is failing. To take the prevailing opinion to its logical conclusion, if the central bank hurts us, it is a small price to pay for the great help it gives us.
My God, how I wish people would not carelessly agree with court economists who serve self-serving politicians who want to spend more money than they could ever get by taxing us!
Nixon’s unfortunate act was committed in front of the public (if you haven’t seen the video of his deceitful little speech, you should watch it). Nixon was forced to resign, and his name will forever bear the stamp of shame – but not because of this. His Watergate scandal involved a minor (by comparison) crime when his henchman broke into his opponents’ headquarters and then lied about it. It’s a lot like putting Al Capone in jail, not on multiple murder charges, but tax evasion.
Present and future consequences of Nixon’s default
The first consequence of the non-return of the currency was the skyrocketing prices until 1981. The second was the fall in interest rates, which continues to this day.
Falling interest rates lead to a sharp rise in government deficits and public and private sector debt. This, in turn, provokes a drop in the marginal productivity of debt – a decrease in borrowing profits, as each new dollar causes less economic growth. Finally, we are losing the purchasing power of profitability – what you can afford to buy not by liquidating an investment, but by using the interest or dividends they generate. Deprived of profitability, people are forced to consume capital. Employment depends on capital, so the consumption of capital has marginalized more than one hundred million people.
Today, central banks are redoubling their efforts to prevent the collapse of the system. Our money masters buy assets. Trillions of dollars in assets. They think that this will somehow get rid of the ailment that persists after the 2008 crisis.
And, perhaps, the next crisis is already brewing. While the Fed buys trillions of Treasury bonds from banks, it simultaneously conducts reverse repo transactions. In a reverse repo, the Fed borrows money from banks, providing them with Treasury bonds as collateral. Clear? The Fed buys bonds from banks, then unwraps and temporarily sells the bonds back to the banks (a reverse repo is a short-term contract).
In chess, this is like moving the bishop and returning it on the next move. Step multiplied by a trillion dollars.
How great it would be if the government didn’t have this Terrible Power over our money! We humans should be allowed to invest in gold or keep bank deposits as we wish. This choice is the key to a free market for interest rates.