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Posted August 14, 2021

Byron King

By Byron King

It’s Half a Century Since Nixon Closed the Gold Window

Every year about this time I recall an event that took place long ago; it’s now 50 years.

It was Sunday, Aug. 15, 1971. The world changed dramatically. My life (yours too, as I’ll explain in a moment) has been touched in all manner of ways.

I didn’t realize the importance of what was happening at the time. But still, I’m an eyewitness to history and here’s what happened.

Usually on Sunday nights back then, my family and I would watch television, particularly the old Western cowboy show Bonanza.

But that evening, something else happened. President Richard Nixon came on television. We weren’t sure what he was going to discuss. The war in Vietnam? Or domestic issues? But if the president comes on television on Sunday night, it must be pretty important, right?

Well, little did we know…

Nixon discussed economic issues. He talked about how the world was suffering from monetary crises. I was in high school at the time and had no economic expertise. But I understood that prices were rising. In fact, my father had often explained how paying for the Vietnam War was causing inflation.

Nixon said that he, as president, was instituting wage and price controls — but only for 90 days. (Ha! They lasted far longer than that.)

Per the president’s proclamation, nobody could raise prices (or get a pay raise). That particular legal power dated back to World War II.

Then Nixon said something that seemed odd to a high schooler, but which changed the world forever. Here’s the key excerpt from the official transcript:

I have directed [Treasury] Secretary [John] Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

That was it. Nixon did something that economists call “closing the gold window” at the U.S. Treasury. In plain language, no longer could foreign governments present surplus dollars to the U.S. government in exchange for gold from the Treasury vaults.

In other words, Nixon broke the U.S. away from the Bretton Woods agreement of July 1944, which I’ve previously discussed here.

Bretton Woods was a wartime monetary deal amongst most nations of the world, including even the Soviet Union, although it was not a formal party. The idea was to stabilize international currencies against the value of the dollar, which in turn was fixed to a set amount of gold at $35 per ounce.

On Aug. 15, 1971, Nixon basically said, “No more.” And for a long list of reasons, Nixon had little economic or monetary choice; he was backed into a corner.

That is, all through the 1950s and 1960s the U.S. spent immense sums overseas, which left vast quantities of dollars in foreign hands. Much of the spending was for overseas military operations, certainly in Vietnam in the 1960s. But many of the rest of those overseas dollars came from rising U.S. imports of foreign goods.

Past a certain point, though, foreign governments had plenty of dollars in their treasuries. They didn’t need any more. France, in particular, turned in dollars and took gold. But other nations did so as well.

By closing the gold window, Nixon ended the hemorrhage of gold from the U.S. But the next issue was along the lines of “Now what?” As in, how was world trade supposed to work if Bretton Woods was abrogated by the U.S. and if there was no more gold as the anchor to global exchange rates?

Long ago, I met a retired federal employee who worked at the U.S. Treasury at the time. He explained that everyone thought Nixon would “reopen the gold window” after the 1972 election. By freezing wages and prices and closing the gold window, the president wanted to remove the economy as a central issue during the upcoming elections. It was a political stunt.

Many believed that Nixon was acting only for the short term. Indeed, people at Treasury and all through the U.S. government, as well as in foreign ministries, banks and major corporations across the world, had no idea how world trade could move ahead if the dollar lost status as a gold-backed reserve currency.

Across the globe, there was grave concern that absent a solid, gold-backed dollar the world economy would slip into a state of broken trade arrangements and long-term inflation.

Perhaps Nixon really did intend to go back onto the gold standard after the 1972 elections. But that’s not what happened. Post-election, Nixon soon became embroiled in the Watergate situation. He was politically frozen and had little support to do anything, let alone conduct major undertakings like restoring a worldwide gold standard. And by 1974 he had resigned.

Meanwhile, in October 1973 a group of Arab nations attacked Israel and the U.S. rushed large amounts of military supplies to the Jewish state. Arab nations were incensed and embargoed oil shipments to the U.S., which led to energy shortages manifested in long lines just to buy gasoline. (I recall those as well. I was in college at the time.)

In late 1973, Nixon, his Secretary of State Henry Kissinger and an array of reps from Arab nations agreed to stabilize the dollar against barrels of oil, which led to the so-called “petrodollar.”

And ever since those times, the dollar has been the world’s reserve currency only because most oil-exporting nations price petroleum against it.

But oil or no, it’s not as if the dollar has been a stable currency over the past 50 years. According to the St. Louis branch of the Federal Reserve, the dollar has lost over 85% of its purchasing power since 1971. Here’s a chart, where the dark line shows the dollar index dropping from over 240 to about 40 over the past half-century:

Meanwhile, over the past half-century, the same FRED chart shows the nominal (non-inflation-adjusted) price of gold moving from $35 when Nixon closed the Treasury window to over $1,800 today. It’s an upward move of over 50 times from the old Bretton Woods gold fix.

This is what half a century of inflation and declining purchasing power looks like. Meanwhile, absent any real anchor to the dollar, such as what Bretton Woods created with its gold fix, U.S. politics transformed into a long-term deficit spend-a-thon.

Here’s another chart from the St. Louis Fed showing the U.S. national debt going back to 1940, before entering World War II. And those first 31 years before Aug. 15, 1971, are telling as well.

Look at the federal debt in the 1940s through 1960s. This includes the Second World War, Korean War, early days of the Cold War and even Vietnam. Yes, there was federal debt, but in the grand scheme, it was quite small, almost negligible on this chart.

But now look at the federal debt since 1971. After Nixon closed the gold window it kicked much higher by the 1980s and into the 1990s. Then after 2000, the federal debt began to skyrocket. It was just shy of $24 trillion in 2020 and is now in the arena of $28 trillion with recent spending by presidents Trump and Biden.

The deeper meaning of this deficit chart is to illustrate how Nixon exiting Bretton Woods opened the spending sluice gates. The U.S. government, particularly Congress, abandoned spending restraint. The other inflation enabler was the Fed, with its decades-long willingness to monetize federal debt.

Along these latter lines, it’s no accident that the current Treasury secretary is Janet Yellen, former chair of the Fed. Her role now is, in essence, to dovetail, if not merge Fed and Treasury operations such that no level of spending ever goes unfunded. The money spigots are wide open.

Meanwhile, per Fed policy, interest rates will remain low because there’s no way that the U.S. government can ever begin to afford to pay more to its global array of bondholders.

What a difference 50 years makes. From a summer long ago to now, it’s been year after year, decade after decade of unmoored federal spending. And mere lip service paid on rare occasion to any concept of controlling an ever-expanding budget and constantly declining currency.

When it comes to deficit spending today, the U.S. government is going from bad to worse. The government spends more and more, with no political restraint, let alone any semblance of maintaining the reputation of the nation as a solvent entity. Look at recent, multitrillion-dollar spending blowouts for just about everything.

How does this end? Nobody really knows, although there’s much room to speculate. Business as usual, perhaps, with more inflation and declining currency. Until eventually, the current dollar loses another 85% of its purchasing power. But it won’t take 50 years, and it might take as few as five!

Or perhaps we’ll see something sudden with the dollar, like the monetary equivalent of a heart attack triggered by a shocking event such as a major natural disaster or war. And perhaps the dollar will derail when a large enough group of nations cease using the petrodollar for the oil trade.

Or maybe we’ll see the rise of a competitor currency to the dollar, such as a new payment mechanism from the World Bank, if not regional trading blocs breaking out using, say, Chinese yuan.

The takeaway here is that this month we recall a somber, “golden” (50th) anniversary, that of Nixon closing the gold window and abrogating Bretton Woods. This changed the economic and monetary trajectory of the U.S. economy, as well as world trade. There’s no unscrambling the eggs of this omelet.

What should you do? Well, in the looming era of inflation and currency decline, hard assets are essential. These include “real” things like real estate, as well as energy resources and minerals in general. And of course, there are a multitude of options in this respect.

But this month, for the 50th-year reminder, my view is to get back to basic precious metals, gold and silver. If you don’t own physical metal, it’s past time to get in. Along these lines, our friends at Hard Assets Alliance can help you.

If for some reason you aren’t interested in owning physical metal, then I recommend two precious metal ideas from our friends at the Sprott group in Toronto. They run the Sprott Physical Gold Trust (PHYS) and Sprott Physical Silver Trust (PSLV)

Each fund owns physical gold and/or silver, respectively, using invested capital to buy metal and store it at the Canadian Mint. So by owning either or both of these Sprott funds, you are buying precious metals and storing them in Canada — outside the U.S., but still accessible, allowing for current COVID issues to cross the border.

And consider this. If you own enough shares in either trust, you can arrange to go to the Canadian Mint to pick up your metal, although an armored car service is recommended for that.

And there are the last 50 years of world history for you, much of it explained by a speech President Nixon gave on a Sunday night. He changed the world. And right now, the best way to protect yourself and preserve wealth is to open your own gold (and silver) window.

On that note, I rest my case.

That’s all for now… Thank you for subscribing and reading.

Best wishes…

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder

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