50 years since the closure of the “gold window”

Part III of IV by Claudio Grass

The Nixon Shock: Where we stand today

A lot has been said and written about the inflationary effects that the closure of the gold window had on the real economy and on ordinary people’s lives. And rightfully so, as this has been among the most devastating consequences of the end of the gold standard and it affected countless workers and savers who have been seeing their incomes wither over time, thanks to the hidden tax of inflation.

However, there was another major shift that was triggered by the Nixon shock and it had very serious political and social implications, that we can still clearly observe today. The total removal of any real constraints on the dollar and other currencies has resulted in the unprecedented explosion of debt worldwide, while it also unleashed the era of limitless printing and reckless manipulation of the currency. This handed central planners the ultimate weapon in their efforts to centralize and concentrate power and control. After all, whoever controls the currency, controls everything else too.

All kinds of grand designs, poorly thought out policies, politically motivated government programs and vote-hunting excesses became not just possible, but the norm. Inane schemes, wasteful projects and misguided ideas that would have otherwise been stopped in their tracks simply by the limitations of a gold-backed currency, can now be easily paid for. Inefficiencies, malinvestments and a debt burden that future generations will never be able to cope with, are of course among the main problems of this shift. And yet, there is an even darker side to it: the state monopoly on money and the absolute and exclusive control over it, doesn’t just allow politicians to pay for their extravagant campaign promises and give out “free lunches”. It also enables them to enforce abusive, aggressive and even outright coercive policies that would have otherwise been practically impossible to carry out.

Wars, invasions, occupations and decades of foreign interventionism are the most obvious examples. As western citizens, we have become so used to this policy direction over the years that we don’t even question how it is practically possible or what would it take for it not to be. Moral constraints are clearly nowhere to be found among the political class, nor are there any tools for the people to directly and effectively express their objections, not in a representative democracy anyway. The only way to stop or even prevent these atrocities, especially when they are totally unnecessary and only fueled by greed and the prospect of political gain, is the inability to finance them. 

And while decisions like that cost millions of lives and destroy countless others, ravaging entire nations and condemning whole societies to years violence and poverty, the impact on the West is minimal. Here, the power of the pursestrings has largely been used to support the growth of the welfare state. Domestically, we’ve only seen this monopoly at work to pay for all those “free lunches”, for all the subsidies and government programs aimed at swaying voters or appeasing interest groups. If there is a “carrot and stick” analogy to be found in this absolute power over money, we’ve been getting the carrot for decades. Or at least that was the case until 2020. Because ever since the pandemic hit, we also got to see what the stick feels like too.

As Jim Reid, head of thematic research at Deutsche Bank pointed out in a client note, “There is no way we could have locked down economies, and furloughed employees in the pandemic under a gold-based system.” Of course, it’s true. Without the ability to spend unprecedented amounts and inject trillions into the economy to keep it artificially afloat, there is no conceivable way that governments could ever have just pulled the switch and ordered people to simply stop working, stop producing, stop earning a living. No rational human would ever comply with that order and no government, no matter how mighty, would be realistically able to enforce it. All the lockdowns, the border closures, the stay at home directives and the forced business closures were only possible thanks to the limitless printing, borrowing and spending. 

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. 

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