In their impossibly good book Money, Markets, and Sovereignty (2009), Benn Steil and Manuel Hinds make the point that over the last four thousand years, the only period in which humanity has not consistently based its currency in metal, specifically gold, is the last forty. That’s right. Ever since President Richard M. Nixon announced forty years ago today, on August 15, 1971, that the U.S. would no longer officially trade dollars for gold, we have been enjoying a new era of human history.
Enjoying not being the mot juste. Out of the gate, we got the 1970s, what with their stagflation, a real stock market performance worse than that of the 1930s, and a crisis of confidence such had never bedeviled the American people before. There were go-go years in the 1980s and 1990s, to be sure, when stocks increased 15-fold and the tech revolution changed the world. But now we have our woebegotten 2000s, where stocks lose ground against the price level year after year, 9% unemployment is the new normal, and explosive government spending and Federal Reserve blowouts can’t create a job.
Since 1971, that is, we’ve had two completely unacceptable periods of economic performance bounding one highly salient one. The control being the price of gold. The stuff went from $35 at Nixon’s announcement to $800 by 1980. On the implementation of Ronald Reagan’s economic plan in the early 1980s, gold promptly settled to ten times the Nixon level, or $350, and parked there for two decades. As the George W. Bush presidency came into its own in the early 2000s, gold started a classic curve of acceleration such that it went from the $350 par to today’s $1700 in almost perfect exponential fashion.
You wonder why people don’t just say, OK, stabilize the price of gold. Conduct monetary and fiscal policy such that the gold markets are content to sit tight, and marvel at the economic results. Do otherwise, and have a rendezvous with the 1970s/our own day. Rarely in the history of political economy are choices so stark, so obvious. You start to think you’re being had.
Nixon, for one, thought gold-price stability was bogus. It’s clear as a bell why he went off gold. We have the White House tape recordings from the previous week to let us know. (These culminate, as they must, on Friday the 13th, 1971, as choppers take the administration economic crew to a secret location…Camp David.) Nixon thought that gold would go through the roof on being de-linked, in that the Federal Reserve would print money like crazy now that the currency was not collateralized, and this overprinting would effect jobs, jobs, jobs.
Unemployment, you see, had just gone from 4% to 6%—quaint numbers, no?—and Nixon was “not about to be a hero” (his words) on inflation at the expense of unemployment. Money must be printed, and if gold was a bar to this, gold must go. At any rate, Nixon was confident he could take care of any resultant inflation by outlawing it.
No kidding. The real energy exerted that fateful week was devoted not to the gold question per se, but to what extraordinary, untoward, and secret means the administration could devise to prevent the general price inflation which surely was to follow the elimination of convertibility. A rigorous regime of wage and price controls was settled on. The enforcement mechanism was to be IRS audits and getting shut out of federal contracts for those who raised prices after August 15.
The secrecy? It was to prevent prices from going up before the announcement of going off gold and the wage-price controls, an announcement cleverly made on Sunday night (the 15th) to a comatose nation. These guys were on the cusp of one of the most momentous monetary decisions in world history, and the major worry was what groceries were going to cost for a few days. In case anyone’s wondering, double-digit inflation was another scourge of the 1970s.
Sometimes history begins as farce, to coin a phrase. Well, farces also initiate learning curves, and at this remove, it’s time to reflect on the accumulated wisdom. To wit: Gold that naturally settles to par reflects sound and desirable economic policy. Along with this lemma: Gold that whipsaws, specifically balloons, means you’re doing public policy all wrong. Lessons for today include an about-face into monetary restraint, tax reform, and a spending cut-and-cap.
When Nixon’s policy became clear to the Fed Chairman, Arthur Burns, that August week, Burns exclaimed, “What a tragedy for mankind!” It’s high time to put the whole thing, farce, tragedy, you name it, into the historical dustbin and return to the gold-based monetary system we were so near to in the 1980s, and which for eras before had supervised unexampled economic runs at the standard of the industrial revolution.