On August 15, 1971, Richard Nixon announced to the country that the international gold standard was completely dead. He also announced wage and price controls and tariffs, but the price inflation problems had only just begun.
It is interesting that the announcement of wage and price controls, supposedly to control price inflation, came at the same time that Nixon was giving the green light to the Federal Reserve to create massive amounts of money out of thin air.
The Federal Reserve (the Fed), the nation’s central bank, was created in 1913. Roosevelt outlawed the private ownership of most gold in 1933. After the Bretton Woods agreement in 1944, gold was still redeemable for U.S. dollars by foreign governments. So there was still some tie of the dollar to gold.
The Fed increased its money creation in the 1960s, and France, under Charles de Gaulle, started to demand gold in exchange for dollars. In other words, de Gaulle called the U.S. government’s bluff.
If the U.S. had tried to keep its promises of tying gold to the U.S. dollar, then the government/ central bank would have eventually run out of gold. So in order to stop this, Nixon just broke the deal.
Nixon is only to blame to the extent that he was part of the establishment and did nothing to oppose the system. He just happened to be president when the Fed was rapidly expanding the monetary supply while losing gold. What Nixon did was inevitable at that point. Unless Congress had drastically cut spending and the Fed stopped printing, then there was no way for the U.S. to keep its promises of gold redeemability under the Bretton Woods agreement.
Once this last tie to gold was cut, it was a free-for-all for the Fed. The Fed could print money (physically or digitally) without any restraints except for the prospect of hyperinflation.
The Fed did face runaway price inflation in the late 1970s. Paul Volcker was put in as chair of the Fed to slam on the monetary brakes and retain the dollar as the world’s reserve currency. The recession, or recessions, in the early 1980s was the last good cleanse of malinvestment that this country has seen.
Everything that happened in the 20th century described above led to where we are right now. This is how it is possible for the government to run trillion-dollar deficits on an annual basis. This is how it is possible that the national debt exceeds the GDP. This is how it is possible that the Federal Reserve’s balance sheet has grown almost 10-fold over the last 13 years to over $8 trillion.
For this disaster, we can thank Wilson, Roosevelt, Nixon, and all of the other presidents in between and since that enabled this recklessness. We can thank all of the politicians and bureaucrats who supported this corrupt system. We can thank all of the American people who blindly trusted their public officials to do the right thing.
The Fed is still limited by the constraints of hyperinflation. That hasn’t changed. Therefore, unless the Fed is willing to risk hyperinflation, we are going to see a reversion to the mean at some point.
This will mean massive bubbles that will pop. It will mean massive bankruptcies and deleveraging. It will mean a tough adjustment for those living in a fantasy world of artificial bubbles.
The good news is that Congress, at some point, will be forced to scale back. It will mean a lot of broken promises for a lot of people. It will mean some tough times. But this is what happens when you allow power to be exploited with few limits.
While it hasn’t been pretty, things have managed to hold up for 50 years. I don’t think this game can keep going for another 50 years.