There are many days in history that will forever live in infamy, and this year marks the 35th anniversary one of those. On August 15th, 1971, President Nixon closed the so-called "gold window", thereby ending the US dollar's last remaining direct link to gold, even though a link is required by Article I, Sections 8 & 10 of the Constitution. The consequence of his actions has been three and one-half decades of fiat currency, and a dollar that today has less than one-tenth of the purchasing power it did when Nixon put the dollar on this inflationary path.

The essay that follows provides some important perspective and insight into the events surrounding that date. It was written by Bill Buckler, editor of The Privateer, who has graciously allowed me to share his essay with you.

http://www.the-privateer.com

A Quote From August 15, 1971
by William (Bill) Buckler
© Copyright 2006 by The Privateer Market Letter. All rights reserved.
Reprinted with permission.

Introduction

In any discussion of the future of Gold, or of the price of Gold, the first thing that must be realized is that Gold is a POLITICAL metal. In the true meaning of the word, its price is 'governed'.

This is so for the very simple reason that Gold in its historical role as a currency is fundamentally incompatible with the modern worldwide financial system.

Up until August 15, 1971, there has never in history been an era when no paper currency was linked to Gold. The history of money is replete with instances of coin clipping, printing, debt defaults, and the other attendant ills of currency debasement. In all other eras of history, people could always escape to other currencies, whose Gold backing remained intact. But since 1971, there is NO escape because NO paper currency has any link to Gold.

All of the economic, monetary, and financial upheaval since 1971 is a direct result of this fact.

The global paper currency system is very young. It depends for its continued functioning on the BELIEF that the debt upon which it is based will, someday, be repaid. The one thing, above all others, that could shake that faith, and therefore the foundations of the modern financial system itself, is a rise (especially a sharp rise) in the U.S. Dollar price of Gold.

A Quote From August 15, 1971

For anyone new to these pages, August 15, 1971 was the day when the Nixon Administration announced that they had cut the last tie binding the US Dollar to Gold. Prior to that date, the US Dollar could be REDEEMED for Gold at a ratio of $US 35 to 1 ounce of Gold - but only by foreign governments or Central Banks. After that date, the US Dollar was not REDEEMABLE in anything, except another US Dollar. For the significance of this decision, please read the preamble above.

The following quote appeared in Money Meltdown by Judy Shelton. It comes from Mr Herbert Stein who became president of President Nixon's Council of Economic Advisors shortly after August 1971. Mr Stein - along with Nixon, Treasury Secretary John Connally, Fed Chairman Arthur Burns, and Treasury Under-Secretary and Fed Chairman to be Paul Volcker - was present at the Camp David meeting at which the decision to "close the Gold window" was taken: This is what Mr Stein had to say about that meeting.

"Even though acknowledging that the window was closed does not, in this perspective, seem such a historic step, the people at Camp David that weekend did consider that they were cutting the dollar's last link to gold, with the possibly serious effects economically and politically. The issue did not appear on the conventional terms of sticking to the gold standard and fighting inflation versus abandoning the gold standard and tolerating inflation.

Insofar as there was a connection, closing the gold window did not permit less anti-inflationary action but required more anti-inflationary action. There were people, at home and abroad, who regarded our link with gold as an anchor against runaway inflation in the United States. If we were to cut loose from that anchor we would have to offer them some assurance, which was one reason for packaging the closing of the gold window with the price-wage freeze.

For some of the participants in the August 1971 meeting the choice was not gold versus inflation but was gold versus free markets. One must remember that in the summer of 1971 the country was going through one of its spasms of hysteria about the balance of payments, the balance of trade, and, particularly, competition from Japan Inc. This anxiety was stimulating demands for quotas or higher tariffs on imports and for retaining the controls on capital flows that President Nixon had promised to remove. Cutting loose from gold was a way of defusing these demands for restraints on trade and capital movements by increasing the possibility for achieving international adjustment through changes in the dollar exchange rate.

When President Nixon decided to declare that the gold window was closed he knew that there might be serious political repercussions. But these repercussions did not appear. For a great many people closing the gold window was welcomed as a declaration of national economic independence. A much larger number didn't care. There was no more sign of a deep-seated loyalty to gold in 1971 than there has been on any of the other occasions when the government took steps to dilute the role of gold.

This says nothing about whether the action on gold in 1971 was correct. I believe it was wise, but that is another story. The experience of 1971 does suggest that it is unrealistic to think that the gold standard will present governments with an unequivocal choice between inflation and adherence to gold which governments will be forced to make in favor of gold because the public has a strong emotional attachment to it."

We cannot ask Herbert Stein today what if anything he would add to his analysis of the closure of the Gold window. He died at the age of 83 in 1999. But what he wrote back in the early 1970s is typical of what all politicians and most mainstream economists thought, and still think, about the role of Gold in the "modern" financial world.

The result of these attitudes, attitudes which have now been assiduously poured into the brains of at least three generations of economists, is the "modern" financial world. The difference is that over the last eighteen months or so, ever since the continuing upward move in the price of Gold could no longer be written off as a mirror image of a falling US Dollar, the same dark fears which propelled Gold from $US 35 in August 1971 to $US 850 in 1980 are raising their ugly heads again.

Let's look at a few quotes from Mr Stein. "Insofar as there was a connection, closing the gold window did not permit less anti-inflationary action but required more anti-inflationary action..." And what was this "anti-inflationary" action? To quote Mr Stein again: "If we were to cut loose from that anchor we would have to offer them some assurance, which was one reason for packaging the closing of the gold window with the price-wage freeze." This is classic. "Anti-inflationary action" consists of passing laws forbidding wages or prices to rise. Since by 1971 the definition of inflation as "rising prices" had been firmly established, this was deemed to be all that was necessary.

The next paragraph also contains a classic: "For some of the participants in the August 1971 meeting the choice was not gold versus inflation but was gold versus free markets. ...Cutting loose from gold was a way of defusing these demands for restraints on trade and capital movements by increasing the possibility for achieving international adjustment through changes in the dollar exchange rate."

This is the modus operandi behind the entire fiat currency edifice. In a system of fixed currencies redeemable in Gold, "capital movements" in the form of Gold go one way while goods and services (trade) goes the other. The former pays for the latter. In a system of paper fiat currencies redeemable in nothing, goods and services still go one way, but what goes the other way is nothing more or less than IOUs - whether the IOU is in the form of an interest-earning debt instrument or a simple "note", like a Federal Reserve Note or US Dollar. And when the amount of this paper required in "exchange" for real goods and services becomes "excessive", the solution is "changes in the dollar (or any other currency so afflicted) exchange rate".

When Mr Stein talks about "gold or free markets" in this context, he is talking about the "freedom" to buy goods and services without having to actually pay for them. Today, every piece of paper issued by every Central Bank in the world is deemed to be "legal tender for all debts public and private". Not having the ability to pass and enforce laws, counterfeiters can only make copies of this legal tender and hope to get away with it. Governments and their trained Central and commercial banks can and do make and enforce the laws, so they have gotten away with it for three and a half decades now.

That leads directly to a last quote from Mr Stein: "When President Nixon decided to declare that the gold window was closed he knew that there might be serious political repercussions. But these repercussions did not appear. ...There was no more sign of a deep-seated loyalty to gold in 1971 than there has been on any of the other occasions when the government took steps to dilute the role of gold."

In August 1971, Gold had not circulated as money for thirty-eight years. On top of that, Americans had been barred by law from owning or trading Gold for that same thirty-eight years. That's two generations. Government had indeed been diluting the role of Gold for a LONG time. And it is true that it was not a "deep seated loyalty to Gold" which propelled its "price" from $US 35 to $US 850 between 1971 and 1980. What did so to a far greater degree was an ever deeper seated DISTRUST of the US Dollar.

What led to that distrust was not any deep understanding of Gold's role as money or the inevitable consequences of politicians and bankers being let loose in a world where there were no constraints on their ability to lend money into existence. The distrust stemmed from rising unemployment, rising prices across the board, and steadily increasing interest rates. It stemmed from the onset of FALLING living standards for the majority of Americans, a condition which has continued to this day and is now deteriorating faster than at any time since what are known as the "inflationary" 1970s, the first decade of the global fiat money system.

In truth, of course, a deep seated loyalty to Gold and a deep seated loyalty to political and economic freedom and liberty are inseparable and mutually dependent. You can't have one of them without instituting ALL of them. In equal truth, this is and always has been understood by a small minority of the people. Inside the US and most of the rest of the English speaking Western world, that minority has seldom if ever been smaller than it is today.

In his analysis of the August 1971 decision to sever the Dollar from Gold, Mr Stein comes to no conclusion about whether what was done is "correct". What he says is as long as the public doesn't care about or even know about the connection between Gold and their personal and financial well being, such questions are beside the point.

The problem is that the question cannot, by the nature of the fiat money system, remain "beside the point" forever. It wasn't beside the point at the end of the 1970s when Fed Chief Volcker was faced with the choice of abandoning control of US interest rates or presiding over the demise of the US currency. It isn't beside the point now when everyone from the IMF to the OECD is screaming from the rooftops about the utter unsustainability of the US "twin deficits". Everybody still gives lip service to the hope that a "benign solution" can still be found. The problem was that Gold soared from $US 515 to $US 720 in the five months between mid December 2005 and mid May 2006. That was opening the question in more and more minds that just maybe there wasn't any "benign solution" possible.

There isn't, of course. But everything is still OK as long as the public doesn't really suspect it. Gold at $US 650 is asking less pointed questions than it was just over two weeks ago when it was at $US 720, but apart from that, the situation remains just as it was.

Over the three and a half decades of the floating fiat currency era, not a year has gone by when a financial crash or crisis didn't crop up somewhere. As time has passed and the issuance of debt paper has accelerated, these crises have become more frequent and more damaging. But since Gold peaked in $US terms in 1980, it has been the one "price" above all others in the new system which has been short circuited. As we say at the top of this page, in an introduction which stands unchanged since it was first posted on this website more than ten years ago in late 1995: "The one thing, above all others, that could shake that faith, and therefore the foundations of the modern financial system itself, is a rise (especially a sharp rise) in the U.S. Dollar price of Gold."

That is what the US Dollar price of Gold is now doing. The "correction" of the past two weeks will do nothing more than delay the inevitable. The only thing left to wait for is to see how long it takes to be resolved.

The Privateer

Published by GoldMoney
Edited by James Turk, alert@goldmoney.com

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