The Great Dollar Standard Turns 40

In the history of money in the world… 40 years really isn’t that much time.

Today we celebrate the 40th birthday of the Great Dollar Standard era, initially by quoting (liberally) from our own Empire of Debt:

On Aug. 15, 1971, the administration of Richard Milhous Nixon did something extraordinary. It slammed the “gold window” shut. Henceforth, foreign governments would not be able redeem their surplus U.S. dollars for gold.

Mention the late president’s name and the average person recalls the crime with which he is most associated: B&E (breaking and entering) at the Watergate. But while the public’s attention was distracted by Nixon’s fumbling sidekicks, another team of Nixon’s goons was pulling off the biggest heist of all time.

What was their crime? Breach of contract? Theft? Fraud? Counterfeiting? It was all of those things. The breached the solemn promise of five generations of U.S. Treasury officials and set in motion the worldwide credit bubble of the pax dollarum age.

In 1971, the decision to abandon the gold standard was not exactly an improvisation.

The decision was part of a series of moves made by the Nixon administration to hold down wages and prices and to check inflation. Consumer prices rose at 4.9% in 1970 and inflation looked as though it was going to get worse. Nixon came to believe that he could control the economy, even though this shift in policy contradicted his own political and economic philosophy as stated in the past.

In the cut of I.O.U.S.A. we screened at the Sundance Film Festival in January of 2008, we had audiotape of Nixon conspiring with his advisers to blame the decision to close the “gold window” on “speculators.” After we sold the film to the Peterson Foundation, that story beat was edited out. The final cut of the film released in Aug. 22, 2008 blames rampant inflation in the 1970s on Arthur Burns, then chair of the Federal Reserve.

Alas, the Federal Reserve system was set up [in 1913] to provide the nation’s empire builders with a convenient, expandable and compliant money. Whenever they felt they needed more of it, the dollar was right there, ready for duty.

Since 1971, the United States has added trillions to the world’s supply of dollars and credit. During this same time only about 58,000 metric tons of gold have been brought from the ground. Sooner or later, those extra dollars must be marked to an unforgiving market.

“Of course,” we wrote back in 2005, “it hasn’t happened yet. Investors are tempted to look out their windows, see the sun shining and think the dollar will last forever. They have no interest in the financial crimes of the Disco Age.”

On this 40th anniversary, with gold in the ballpark of $1,800 and potentially rising, we suspect the interest level in Nixon’s fateful decision is rising.

On Aug. 15, 1971, gold was pegged at $35 an ounce… as it had been since 1933.

As of this morning, it’s $1,737 – off from last week’s highs, but higher than it’s been at any time up until 10 days ago.

After shunning gold, the “barbarous relic” lo these many decades, the world’s central banks are adding to their gold stashes at an unprecedented pace.

New figures from the World Gold Council reveal central banks adding 208 metric tons in the first half of 2011. Should this pace keep up, the annual total will smash the previous record of 276 tons in 1981.

Thailand, South Korea and Mexico are among the major buyers in recent months.

Ordinary people, that is “we, the public” can’t seem to get enough of the stuff. Sales on eBay of 1-ounce U.S. Gold Eagles and 1-ounce Pamp Suisse bars rose steadily most of last week… and so did the premiums buyers were willing to pay over the spot price.

Spot gold jumped 6% between Friday Aug. 5 – just before Standard and Poor’s downgraded Uncle Sam – and last Wednesday. But Gold Eagle prices on eBay rose nearly 8.5% over the same period.

“When people are coming down to the question, `Do they want to have cash in the bank or gold in their hands?’ the answer is they’d rather have gold or silver,” says Jacob Chandler of Great Southern Coins, eBay’s largest seller. “Business,” he says, “has nearly quadrupled in the last six weeks.”

In come the speculators…

Addison Wiggin
for The Daily Reckoning