50 years since the closure of the “gold window”

Part II of IV by Claudio Grass

The lasting impact of the Nixon Shock

The economic and monetary consequences of Nixon’s decision to end the convertibility of the US dollar to gold are as numerous as they are severe. It marked the start of five decades of monetary and fiscal insanity and it unleashed unprecedented borrowing and deficit spending sprees. Debt-fueled “growth” became the name of the game and currency manipulation came to define both political strategies and central bank mandates. 

The US, as well as most of its western peers, reached debt levels that were once thought to be simply impossible to sustain. Real purchasing power declined and official inflation figures were only kept in check thanks to crude but effective tampering with the CPI formula. Global financial crises became part of normal, daily life, taken for granted by the public, and seen almost as natural phenomenon that really isn’t anyone’s fault. Recessions are now occurring much more frequently, and even though they don’t last as long as they used to, that’s only because they are “patched” by adding even more debt and more incentives to take on more risk. 

All in all, that fateful move by Nixon to sever the last link between any national currency and gold has been behind most of the serious economic problems we face today. However, there was another effect that the Nixon shock had on the global economy and on modern politics that goes largely under discussed. That move also marked the beginning of the obvious and shameless politicization of monetary policy. 

Nixon’s decision to close the gold window was motivated by transparently political reasons. He knew very well that a recession could cost him the 1972 election and this was just one in a long series of attempts to prevent it. Other strategies included strong arming the Arthur Burns, then the Federal Reserve chairman, to lower interest rates, while he also instituted wage and price controls to keep inflation under control. When it became clear that none of these desperate efforts would deliver the growth and unemployment drop he needed, he resorted to “brute force”, by tearing down the Bretton Woods System.

A slippery slope 

While Nixon was mostly applauded at home for his decision to unilaterally break the US promise to convert dollars into gold, the reaction internationally was mainly one of outrage. At the time it was hard for most people to imagine that political games could reach that far into the realm of monetary policy and in such a blatant, cavalier and reckless way. 

And yet, politically speaking, not only was the US not punished for it, but it came to reap immense benefits from that move. It handed the nation an exorbitant advantage, as it cemented the USD as the world’s reserve currency. To this day, it is this global demand for dollars for trade, banking, and reserves that allows the country to finance its chronic deficit in international trade, as well as sustain its growing budget gap. Even more importantly, the USD’s dominance has given the nation a vast geopolitical edge, which, to a very large extent, explains its position as the world’s biggest superpower. 

These huge political gains on the international stage, combined with the freedom to print money at will to pay for crowd pleasing government expenditures at home, served as a valuable lesson to the next generation of politicians, not just in the US, but all over the world. It became clear that the currency can play a much more interesting and useful role if it was brought under the direct control of whomever happens to be in power at the time. It can be manipulated, controlled and deployed as just another policy transmission tool and it can make impossible promises seem realistic. 

From Nixon to MMT

In this light, it is really not surprising at all to see the natural evolution of this line of political thought. It was a slow and gradual process, but over the decades, the link between money and anything tangible did fade away in most people’s minds. The overall financial illiteracy of the general population, the abysmal state of public education and the near-total lack of monetary history understanding have all helped guarantee that very few voices would be raised against the “consensus”. It has come to be widely accepted that the government and its central bank are and should be in complete control of a nation’s money and that this monopoly is essential for the economy to function.  

Given this concession, it is not hard to see how we moved even further into economic and monetary surrealism. After all, if the government manipulating the currency is a good thing, why not do more of it? If inflation doesn’t matter, why should deficits? This is, after all, the main argument behind the increasingly popular Modern Monetary Theory and while it is economically nonsensical, it is politically entirely reasonable.

It is all nested in the core idea of decoupling the currency from anything real or tangible and supplanting whatever value or legitimacy this backing would offer with blind faith in the government. It has nothing to do with economic forces or with the intricate dynamics of the monetary system. 

MMT, as well as all the centralization-pushing policy “nudges” that preceded it and set the stage for it, might be posing as an economic theory, but it is an ideological and philosophical shift that figures into the same political agenda. In this sense, it is nothing new. Since time immemorial leaders and rulers of all stripes clearly understood that whoever controls the money controls the people too. 

Claudio Grass, Hünenberg See, Switzerland

This article has been published in the Newsroom of pro aurum, the leading precious metals company in Europe with an independent subsidiary in Switzerland. 

This work is licensed under a Creative Commons Attribution 4.0 International License. Therefore please feel free to share!