The history of the Nixon Shock doesn’t begin in 1971, it goes all the way back to 1792. As Keith wrote about in his article, Nixon’s decision to close the gold window was the culmination of a long history of bad decisions. Decisions where government repeatedly and wrongly interfered in matters of money and credit, where each subsequent decision compounded the ill-effects of the previous one.
In other words, the Nixon Shock is the not-so-grand-finale of a long and checkered history of the federal government messing with people’s money.
In this episode of the Gold Exchange Podcast Keith and John unpack that series of unfortunate events that led up to the Nixon Shock, and why what happened 50 years ago, still matters today. They discuss:
- The Coinage Acts that paved the way for Nixon’s default
- The Federal Reserve Act of 1913
- Executive Order 6102
- What’s midnight gardening?!
- What Nixon’s default means for US citizens today
Additional Resources for the History Behind the Nixon Shock
John Flaherty: Hello again and welcome to the Gold Exchange Podcast. I’m John Flaherty and I’m here with Keith Weiner, founder and CEO of Monetary Metals. August 15th 1971 is a significant date in the history of money. It was the day that Richard Nixon closed the gold window, meaning it became impossible to redeem dollars for gold at a fixed rate. Here is the soundbite of the infamous press conference, in Nixon’s own words.
Richard Nixon Audio Clip: I have directed Secretary 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 interest of the United States.
John Flaherty: This year marks the 50th anniversary of this event. So naturally it has been highlighted in many recent articles across the gold universe. Monetary Metals published our own article on the subject, and we are excited to discuss Keith’s unique take on the matter. Keith much has been written on this significant anniversary, especially recently. You took a unique approach in your article by pointing out that this catastrophic event was actually the culmination of hundreds of years of bad decisions and monetary policy. But before we rewind, let’s get your take on the event itself.
Why, in a few words, was this such a tragic and infamous bit of history?
Keith Weiner: Most people that are talking and writing about this are saying the same thing, inflation. That gold constrains the government from printing too much. Nixon got rid of the gold constraint. Therefore the government was able to print heck of a lot more, and therefore inflation began to rise much faster. So in a way, they remove the moral dimension. They remove the fact that something wrongful was done and they focus on a statistic. And of course, statistics are not particularly persuasive. Nobody changes their view based on citing a statistic.
But then secondly, in the inflation statistics, so-called, and regular readers and listeners of a podcast, they know that I don’t define inflation as rising consumer prices anyway. But inflation misses, what I think are the two key features of what happened post-1971, and those are the complete unhinging of the debt and the complete unhinging of the interest rates. So post 1971, but that begins to grow at an exponential rate and post 1971. The interest rates first begins to shoot the moon, finally reaching its apogee in 1981 and then begins to fall in 1981.
And that free fall is still occurring today. The rise of the interest rate is enormously destructive. I liken it to you have a crane with a wrecking ball and the wrecking ball swings to the north side of the street and it levels the buildings and turns them into rubble. And then the falling interest rates, the wrecking ball swings over to the south side of the street and begins laying waste and creating ruin over there. It doesn’t repair anything on the north side of the street. It just does its damage in a different way on the other side.
So the tie to gold or the gold standard as such has a stable interest rate. And when you have a pure Fiat currency or pure irredeemable currency, the interest rates can go anywhere, and it probably does. And that’s been experienced in the US.
John Flaherty: So, Keith, you break down the road to 1971. The 1971 default into seven major milestones. Let’s rewind to the year 1792 and 1834 and learn how all of this got set into motion.
Keith Weiner: Yeah, I don’t want to go too much on ancient history. 1792 government passed the Coinage Act, it seemed pretty benign, mostly is, except for two things. One, it gave the government the power to set the value of money… Some people argue the Constitution did that as well. But I mean it in a different sense, I don’t mean standardizing size of a coin. In other words, everyone knows gold is money, and now we’re saying that money should be coined into coins of this size for convenience sake.
And that way all coins are fungible. And everyone knows if you have $2 worth of gold, exactly how much gold that is. In those days, gold was a weight. But it fixed the value of silver in terms of gold at a ratio of 15 to one, so 15 grains of gold to one grain of silver, 15 grains of silver to one grain of gold, or 15 ounces of silver to one ounce of gold. And that is a terrible, terrible power to grant the government. One that is bound to be abused.
And in fact, in 1792 they did abuse it. They overvalued silver. In world markets, the ratio was about 15 and a half to one. By setting it at 15 to one, that means it takes a bit less silver to buy the ounce of gold than it would in world markets. Therefore, silver is worth more as units US coinage than it is as a commodity in world markets. And therefore they’re giving a little bit of free value to those who had silver, and taking it away from those who had gold.
Gresham’s law tells us that if you fix two unequal things and make them equal by law, that for money, then the one that is undervalued will not go into circulation. So effectively this puts… US was on a bimetallic system, but the fact that for the most part, is the silver standard at that time. 1834, they reversed it and said, “Well, now the ratio is going to be 16 to one. So now gold is a bit overvalued as money and silver is undervalued. And then that begins the long process of official demonetization of gold.
And again monkeying west value, which is not a power that the government… If I wrote the Constitution, the government would never have that power.
John Flaherty: My follow up question is, was that ratio strategic? Obviously, it benefited some people. But did they have that in mind when they fixed the ratio to favour silver? Or was it just a result of good-intentioned central planners, but they couldn’t foresee what it would do? And then follow up question is, was the adjustment an attempt to try and remedy the first mistake, which is what we see all too often.
Keith Weiner: That’s a good question. I haven’t studied the political environment of that time to know who would have been lobbying what ratio to be what. And I do know that things are highly politicized even then, the guy who came up with this coinage act and promoted it was none other than Alexander Hamilton. And of course, he was also the promoter of the bank of the United States, which later was called the First Bank of the United States, which was absolutely a crony institution.
It wasn’t the central bank that we come to know and hate today didn’t have quite the power to the Fed. It was a crony institution, the government owned part of it. They sold shares to the public as part of it, and the bank lent the government the money to buy the shares of the bank, which is something that would never occur, except it was a crony institution. Why do they do that? Of course, the government granted it a monopoly. They were the sole-licensed bank to do that kind of activity.
That was obviously very political that benefited Hamilton and his friends, and that created a lot of losers as well.
And so the same guy within two years comes up with the Coinage Act and I’m sure the politics of then were in favour of that. Did they not know that silver was 15 and a half to one to gold? One would think they probably did have to know that. But I haven’t done enough historical reading to know. Who knew what at the time and what was said on or off the record or whatever that I could speak to.
John Flaherty: Sure, well, let’s fast forward a bit to 1861. Talk to us a little bit about the Greenback.
Keith Weiner: You know, something needs to be said, which is governments like to use irredeemable currency to pay for war. Right. If you have to actually unload the gold out of the treasury and pay it out to buy ammunition and pay soldier salaries and stuff, you run out of gold pretty quickly. So they love the power of the printing press. And so in 1861, they issued the Greenback and declared it to be not redeemable in species. If I recall the history of that time, taxes still had to be paid in gold species or silver. But the revolution of the currency now, and they’re using it to pay their war debts, at least excuse me, work expenses not debts in this irredeemable currency.
And for a while, the US was off an official metallic standard.
John Flaherty: So the next milestone you mentioned in your article is the Coinage Act of 1873. Why was that significant?
Keith Weiner: So when the government went off metal in 1861, of course, everyone’s said, this is just temporary just to pay for the war. There’s always that doubt. As soon as the government can do that, as soon as they can put their hand in the cookie jar. Of course, because of emergency, or as Denis Gordeev would say in Lord of the Rings, “Only at the utmost end of need.” Is that really the end of it? Or did they find that terribly convenient? So after the Civil War was over, this was a hotly debated policy.
1873, they passed the new coinage act, effectively recognizing gold as money, but curiously omitting the standard one-dollar silver coin. So effectively demonetizing silver. And this really screwed the farmers and the craftsmen, the artisans. So if you look at who was in America at that time, you have the smaller savers, and then obviously you have the wealthy. The wealthy tended to have gold, and they tended to have the gold in the banks. And the smaller savers tended to have silver. Silver tended to be at home a lot more often.
And of course, then, as now, farmers were borrowing money to finance their crops and all kinds of things. And by coming along and saying the law doesn’t recognize silver anymore, all debts that had been incurred up to that point now are redenominated in gold and their savings, which is, if you have some money and you owe some money, what you have offsets what you owe. You have $100,000 mortgage on your house, you have $80,000 in cash. You have a net $20,000 debt. So you’re not too badly off.
So what they did is they devalued what people held as money, but revalued higher what they owed. So that really impoverished again, the farmers and the craftspeople. So this became known as the crime of 1873. And there was quite a lot of and justifiablely so quite a lot of anger as a result of that.
John Flaherty: Understandably. So, now we come to the Federal Reserved Act of 1913. Keith, why was this another bad decision?
Keith Weiner: The people still remembered that crime of ’73 and in fact, it actually became a big issue in the election of 1896. William Jennings Bryan, populous champion of the people, wanted to remonetize silver. William McKinley, being Republican, was for the gold standard only. McKinley on the gold standard won. The people were still smarting and they were like “These issues don’t go away.” You screw an entire group of people. The resentment just builds it doesn’t really dissipate. So they said, “Okay, right. We can’t lighten our debt burdens by recoining silver, okay, let’s get behind giving the government a new central bank and essentially devalue the money that way and ease the burden of the debtors.”
So 1913, William Jennings Bryan surfaces in the Woodrow Wilson administration. And is absolutely instrumental in enacting the Federal Reserve Act, which gives the government now the exclusive power of printing the currency, but also monetary policy. It wasn’t authorized to buy government bonds at a time. By the way, The Federal Reserve Bank, was not created to address inflation and unemployment. That was retroactively added much later.
At that time, it was to stabilize the business cycle because the free market was alleged to be unstable. And, of course, what it does is it destabilizes interest rates. Interest rates begin to rise. Then they began to fall. The falling interest rates in the 1920s created that incredible boom. People felt a lot richer than they really were. The boom ends when you run out of capital, then we have the crash of ’29 and, of course, a series of bad policy responses, including the Smoot–Hawley Tariff, which made it worse and leading up to 1933.
John Flaherty: What happened in 1933?
Keith Weiner: So President Roosevelt did a number of things, very famous for confiscating the gold of the people, made it illegal to own gold. So the way today it’s illegal to own cocaine, if they catch you with it, you go to prison. In those days, if you own gold, after his decree you would go to prison. Everyone assumed that he was just grabbing loot. But that wasn’t really the thrust of it. I’m sure, no doubt, given FDR and his dalliances with socialist ideology, I’m sure that pleased him to no end.
That wasn’t really the thrust of it. The thrust of it was monetary policy. The whole thing keeps coming back to monetary policy, banking, alleged instability, free markets, alleged need for government to centrally plan our way to prosperity, correct market imbalances and so on. So he wanted to do two things. One, stop the run on the banks.
In those days when people brought in their $20 bill and got the approximately one-ounce gold coin from the bank that was not a purchase of gold. Today you can bring not a $20 bill, but 90 $20 bills. But you don’t bring it to a bank. You’re not redeeming your deposit. You bring it to a third party, and you’re buying a coin off a third party. It has no effect on the monetary system.
The dollars change hands. The gold changes hands. The monetary system is literally unaffected. But in pre-1933, that was a redemption. You went to the bank and said, “Give me my money back. And here’s your piece of paper that says that you owe me this much money.” Gold being the money, the paper to simply being the receipt for the money you had deposited.
And that inconvenienced the banks. Forced the banks to sell assets in order to raise the gold in order to meet the redemption requests. So this was doing two things, one, this was a run on the banks. It’s pulling the capital out of the banks, which is causing them, by 1933, they were they’re dropping like flies. There was a very serious crisis with that. And number two, all the selling of bonds is pushing bond prices down, which is the same thing as pushing interest rates up. FDR wanted to push interest rates down.
That was the Keynesian prescription for that type of environment was lower the interest rate, but yet the action of the people, these darn selfish people, are doing the opposite of what’s good for the collective, or allegedly good, forcing the banks to sell and then pushing bond prices down there for interest rates up. So he wanted to get control of the money and the monetary policy. So he made gold illegal to own broke, voided all the gold clauses and obviously bonds and loans, long term rental agreements, you name it.
He voided the gold clauses and said the currency is no longer redeemable. And that was his supposed idea of fixing things. And then he did one final little malicious act. And that is… So the dollar at that point is not redeemable to American citizens anymore. But it’s still redeemable to foreign governments, foreign central banks.
So he said, “Right, but now we’re going to change the redemption value.” Remember that power. It’s relatively, seemingly benign in 1792. Now the chickens come home to roost in 1933, he says. “Now it doesn’t take $20 to redeem an ounce of gold anymore, now it takes $35.” What is that? About two thirds devaluation of the dollar against gold. So that was a looting, a theft from all the foreign governments that held dollars. Now, of course, if you look at 1933, those foreign governments had other things to worry about. So that didn’t have necessarily the repercussions then, that it might have had if he did that in a different time.
That was 1933.
John Flaherty: And just for the record, that was Executive Order 6102. Two questions for you, Keith, on this issue, was this constitutional? And secondly, what was the broad reaction amongst the American people? Did they just cough it up, or would you say that… What percentage just went out into the backyard and buried the gold for safekeeping? Thoughts on that?
Keith Weiner: Well, with the caveat that I’m not a constitutional expert or lawyer, I don’t believe it’s constitutional, I don’t believe the Federal Reserve Act is constitutional. I think the way the Constitution was originally written, it said, “Here is a finite shortlist of the powers granted to government and anything not on this list, by definition, you can’t do.” So in a free society. The people can do anything they want except for commit one of a shortlist of crimes like robbery, murder, etc. And the government can’t do anything whatsoever except that shortlist of powers that was granted.
I don’t see anything about the Constitution that authorizes the Federal Reserve, much less a confiscation of people’s money. As to did he get gold? I don’t have the number off the top of my head. But the Treasury, I believe, still has quite a lot of gold that was confiscated from that time they melted. They got a lot of the coins, melted them the coinage then.
And actually it’s true for the Gold Eagle today, the gold coin was alloyed with copper and silver to harden it, right. So gold is very soft. And in those days coins were actually circular. People had them in their pockets jingling with other coins and house keys and all kinds of other objects, you needed to harden it. Pure gold would just be too soft and would wear down. So bullion bars as a banking system dealt in a much purer gold than the coins. The Treasury still has quite a lot, if I recall, 93 percent alloyed gold, 93 percent gold 7 percent alloy.
So it did get quite a lot. I think in those days it was definitely controversial don’t get me wrong.
But I think in those days people were just a lot more trusting. The government said do X and it’s going to be for the good of the people, it’s for the good of the nation, good of America. I think a lot of people just accepted that in a way that today it would be almost inconceivable. I mean, today the government says take a vaccine and then half the people conclude the vaccine must be bad because the government wants you to get the vaccine. But in those days the government said do X, I think most people were happy to just go along because they trusted.
There were a lot of people who didn’t and so they either hid the coins. It was a term that came into being around that time called midnight gardening. And that’s when somebody went in their backyard late at night, dug a hole buried the family’s gold, planted a flower over it, put the soil back down, nobody was any the wiser. So it was mixed.
John Flaherty: Alright. Finally we come to Bretton Woods post World War Two agreement. What happened at Bretton Woods? And how did this set us up for Nixon?
Keith Weiner: So actually it wasn’t quite the end of the war, but it was clear we were going to win. So US initially we were allies and then later other countries signed on board to this sat down at Bretton Woods in New Hampshire and the US basically told them, this is the terms of what the monitory system is going to be.
Of course, the US being the sole superpower unscathed. I mean, there was no domestic damage from the war, whereas the other countries were ruined, literally bombed and figuratively. The US said, “This is what you’re going to all do and you’re going to like it.” And gave that smile and all the other country said, “Sir, Yes Sir. Thank you. May we please have another?” Everyone assumed this… So the world agreed to use the US dollar as if it was gold. And then the US promised that it would redeem its dollars for gold to foreign central banks.
John Flaherty: And we’re still at the one to $35 ratio?
Keith Weiner: $35, that’s correct. So everyone assumes this is good for the United States. There’s an infamous quote from Treasury Secretary Connally much later, around 1970 or ’71, when the French I think we’re complaining about what was then called the exorbitant privilege, that the US should print dollars and the rest of the world had to take it as if it was gold. And Treasury Secretary Connally retorted at them, “Well, it’s our dollar, but it’s your problem.” And he smirked.
Everyone assumed this was good for the United States, however, actually was terrible for the United States. Undermined us in so many ways, not least of which undermining American credibility and trust of the rest of the world in America. The architect of this insane monetary treaty was Harry Dexter White, who in later years was discovered to be a tool working for the Soviet Union.
He came up with the scheme, in my opinion, to help his masters undermine America and the Western world and weaken us, to soften us for whatever the Soviets would want to do with us. Certainly wasn’t to our advantage in the same way that heroin is not to the advantage of the junkie, the junkie craves it of course, that doesn’t mean it’s good for him. And the same thing was true for this exorbitant privilege that the US was set up with 1944.
John Flaherty: Well, I mean, it seems like it’s a matter of timelines, right? Did they suspect that we would to use your metaphor, get hooked on the drug and then crash within a matter of a few decades? It’s been a bit longer than that. So it just seems a matter of duration here. That maybe to our advantage in the short run, but in the long run we’re on a not so friendly course with destiny maybe.
Keith Weiner: The damage that was occurring not in 1944, but certainly by the 1950s was the European powers, to the extent of their accumulating dollars began to redeem them. So there was a steady draining of gold out of the treasury. Of course, at that point, the US treasury had no gold income anymore. So every time they had to pay out gold, there was a loss. It could never be recovered. And then that draining of gold from the US Treasury accelerated and accelerated.
The French famously sailed the battleship into Newark Harbor offloaded pallets of dollar bills and unloaded pallets of gold. So the crisis was coming to a head by 1971. I think if I remember looking at the math of how fast the gold was draining at that point and how much gold the US had left, it was a matter of months or maybe a year or two. And they could see that the gold would be drained entirely in the US and there would be no gold left.
And so everyone assumed at that time that Nixon’s logical move was to devalue the dollar again. So move it from $35 an ounce to $70 an ounce or whatever. Robert Samuelson the Keynesian economist who wrote the famous Macroeconomics textbook that every college kid got when they take Economics, had prepared an op-ed for The Washington Post about how Nixon was forced to devalue.
Everyone knew, he was going to make a decision. Even Samuelson assumed that he would just devalue. And then they left it blank as to what the new price of gold would be. Nobody really expected that he would just completely close the gold window except for Milton Friedman whispering in his ear, he said “Do it.”
So 1971 Nixon says, “You can’t redeem the dollar for gold anymore, temporarily.” Remember that temporary suspension of species in 1861? 110 years later, we temporarily suspend it again. So the government, once it has proven that it has the power to do that, well, they can take their power again. And they did it in 1971, and for a few years, everybody was still running around like, “Okay, but how do we get out of this? Is there going to be a new gold price? When do we go back to gold?” And then bit by bit it became clear, “No, that’s not temporary.
There’s no going back to gold.”
So they re-legalized gold in 1975 because they didn’t care anymore. They just said, “Well, let’s just make gold a commodity. Gold is no different than pork bellies or orange juice. Let it trade on a futures exchange. Who cares? Lots of people have their gold if they want to play with it. And pork bellies, at least, are useful as food, gold is useless.” That’s what they said.
John Flaherty: And we have been swimming in a sea of fiat ever since. To wrap up Keith, you have some final thoughts of the ideas behind the Nixon shock, as well as the present and future consequences of that event.
Keith Weiner: So I mentioned that the interest rates and the data are unhinged. I think the interest rates speaks for itself. Anybody can get a graph of interests on the ten-year Treasury bond, for example. So St Louis Fed, which is one of the branches of the Federal Reserve has a lot of great charts, and you can take a look at the interest rate on the ten-year treasury or the Fed funds rate. There’s a lot of different interest rates you can look at, and you can see this incredible run-up, really starting after World War Two and running up to 1981.
But there’s definitely a dramatic inflation point in 1971. So that kind of speaks for itself. The other thing to talk about is the debt. So when you owe somebody gold and you pay them gold, the debt goes out of existence. Gold is a physical thing. And when you pay the physical thing, there’s no debt owing by anybody to anyone anymore. But when you have a redeemable currency, currency is not an object. It’s not a thing it’s not an entity. It’s not an existent. It’s a relationship that if somebody owe somebody something.
So if I have $100 bill and I pay you $100 bill, I owe you $100. Well, $100 bill isn’t a thing that I own. It’s a relationship I have with the Federal Reserve if I have the bill. If I have a checking account balance, it’s a relationship I have with commercial banks. And I pay that to you, I’m out of a debt loop because the debt doesn’t go out of existence as it would if I paid you in gold, the debt is shifted. Now the commercial bank owes you, if I give you a check now, and you deposit it now, your bank owes you the $100.
And so there’s no way to extinguish a debt anymore. 1971 there wasn’t really a domestic extinguisher of debt, but certainly when it came to foreign central banks, there was. And they were doing it. They were coming with their dollar bills and taking out the gold. But after 1971, even that escape valve is closed. And so the debt really begins to explode. And again, I think the debt picture speaks for itself, take a look at any chart of either government debt or all debt in the dollar in the system.
It’s just reached proportions that are just so insane. I mean, here we are, just about $30 trillion in debt. What does that represent for adults that are working in the private sector? So people who work for the government obviously don’t contribute to paying the debt. They’re getting government salaries. And even though they pay taxes on those salaries, they’re living off the government. Only people working in the productive sector can contribute to paying it. If there’s a hundred million people in the productive sector working to support that, that’s a debt of $300,000 for each working person.
That’s way beyond anything that we could hope to repay. And it’s going up in trillions per year. It used to go up at only a mere trillion a year after the global financial crisis of 2008. And before that, when Bush was running a 400 billion dollar deficit, people were gasping and saying, “Oh my God, $400 billion. This is nuts, so everything is just exploding.” And all of that debt represents perfectly good capital that somebody is borrowing spending it on consumption and making a promise to repay it later with interest, but they don’t have the means or the intent to repay it.
This is the moral issue. It’s borrowing without means or intent to repay, which is a fraud a counterfeiting. It isn’t really borrowing, is it? And of course, the people that are giving up their capital doing so because they believe they’re going to get repaid. They thought they were just giving up their capital and getting nothing in return. They wouldn’t do it voluntarily. They would have to be forced at gunpoint. It would be like taxes. People don’t pay their taxes happily or willingly. They do so under duress.
They buy bonds, deposit cash, and banks willingly because they think they’re saving. They think they’re accumulating wealth. So that’s the story legacy of this thing. Is that we’ve dishonored not only debase the currency but dishonored and turn the currency into a counterfeiting operation.
And the counterfeiting operation is now with the afterburners and is counterfeiting at such a prodigious rate that I don’t think you need to have a PhD in economics to know this is not going to end well. There’s going to be a crisis. Ultimately there’s going to be a crisis they can’t fix with all of their monetary king’s horses and all their monetary kings’ men, there will be a crisis they can’t fix.
John Flaherty: Rather than ending on that bleak note, listeners may be interested in learning about how Monetary Metals is working on a way to help the world rediscover a proper gold monetary system. Well, that’s all the time we had today. Thank you very much, Keith, for that enlightening journey through monetary history and to our audience. Thank you for joining us on The Gold Exchange.