Nixon’s Dollar/Gold Speech

July 27, 2011

According to reports in the New York Times and elsewhere, August 15th appears to be a truer date than August 2 for when the United States federal government is likely to run out of resources to meets its expenses, barring Congressional action to raise the debt ceiling.  This new deadline is fraught with historic irony.

Exactly forty years earlier, August 15, 1971, former President Nixon gave a wide-ranging speech to the American people that unveiled tax and spending cuts, imposed a 90-day wage and price freeze, suspended the convertibility of dollars into gold or other reserve currencies, and imposed a 10% import surcharge.  It was the beginning of the end of the international monetary system that had been established at the end of the Second World War.  In defense of the dollar’s fixed parities, U.S. authorities incurred several billion dollars of swap debt in the previous week.  Something had to be done before Monday trading opened.

Nixon was in a vintage combative mood.  He blamed “international money speculators” for the run on the dollar:  “Because they thrive on crises, they help to create them.”  The blatantly protectionist tax on imports was called a necessary offset against an unfair competitive disadvantage under existing exchange rate parities and presented as a temporary penalty that would be lifted after more appropriate exchange rates were restored.  He condemned bad psychology, either by inflationary price setters or those who engaged in any negative thinking about the nation’s economic direction.  Nixon defended the economic record under his watch and boasted that America was on the brink of securing its best combination of peace and prosperity since 1956.  The speech was presented as a three-pronged plan to promote job creation, slow inflation, and to “preserve the position of the American dollar as a pillar of monetary stability around the world.”

The speech promised more than it delivered.  The U.S. jobless rate was 6.1% in August 1971.  It dropped to a trough of 4.6% in October 1973 but then doubled to 9.0% by May 1975.  Price controls were a predictably awful way to restore price stability.  Naturally, inflation fell initially, printing at 2.9% in the year to August 1972 versus 4.6% in the year to August 1971.  However, over the five years following Nixon’s speech, consumer price inflation averaged 7.1%, and the pace accelerated to around 10% during the sequentially next five years to August 1981.  New parities were restored in December 1971, marking the dollar down 14.5% against the yen, 12.0% against the mark, 10.4% against the Benelux currencies, 7.0% against the lira and Swedish krona, 7.9% against the French franc and pound sterling, and 6.0% against the Swiss franc.  Dollar/gold convertibility wasn’t restored, and the dollar was unpegged for good in March 1973.  From its pre-speech levels, the dollar in 40 years lost 81.5% against the Swiss franc, 78.5% against the yen, and 63.0% against the mark.

It will be a sadly avoidable day for the United States if the government defaults on August 15, 2011 but not, you see, the day the music died so far as the dollar is concerned.  From the standpoint of external value, that happened 40 years earlier.  And from the vantage of reserve asset king, the dollar should likely continue to hold that distinction for lack of a service replacement.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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