For a while it was all Bush’s fault. Now, our 37th president, Richard Nixon, is taking the heat for our economic woes.
President Nixon is taking his hits again 40 years after abandoning the Bretton Woods system, the international monetary system in place for most of the 20th century.
On Aug. 15, 1971, Nixon announced that U.S. dollars would no longer be convertible to gold on request. The Bretton Woods system in place at the time obligated the United States to redeem dollars for gold at $35 an ounce.
At that time, and much like today, government spending was rising dramatically due to the Vietnam War and new entitlement programs.
Nixon abandoned the Bretton Woods system because too many requests to redeem gold were coming in. By eliminating the requirement, the government could spend more freely.
The government did, and in response, inflation took off. The average annual rate of change in the Consumer Price Index during the 1970s was more than 7 percent. Gold went from $35 to $800 per ounce by the early 1980s.
With the price of an ounce of gold having now doubled again to over $1,700, many commentators are calling for a return to convertibility, or a gold standard. The argument goes that only such a standard will rein in the prolific spending by the federal government.
The problem with these arguments is that such a standard would just turn our resources toward finding more gold. Governments could also just restrict private gold holdings, as was done in the past, so as to maintain a sufficient level of the commodity to meet their spending plans.
Further, nothing would stop future government officials or policymakers from debasing the currency by simply changing the convertibility rate when it benefits them to do so. Kings have debased their currency for centuries.
The financial market activity over the past few years shows that we currently have a more flexible system than any gold standard. When the stock market got in trouble in 2008 and again this year, investors moved their money to short-term Treasury securities. As the dollar gets into more trouble investors moved to yen and Swiss franc securities.
There are even signs that the price of gold may be topping out. Some of the biggest investors with the worst track record are buying more gold.
The Financial Times reports that central banks around the world purchased about 208 tons of gold in the first half of this year. At this pace, they will easily beat the record annual purchase of 276 tons in 1981. Gold prices reached a peak that year and didn’t return to the same level for more than two decades. Not a good investment.
Central banks have plenty of alternatives if they want to stop holding dollars. Rather than gold, a portfolio of many different currencies is likely to supplant the dollar as a reserve over the next decade. There is no need for a gold standard; the current system is working just fine.
As dollar holdings decline, the federal government will be forced to rein in its spending. If this doesn’t happen, inflation will take off as it did in the ’70s and interest rates will rise.
The global financial markets will keep things in check.
No need to blame Dick.
PETER CRABB Professor of finance and economics at Northwest Nazarene University in Nampa