Forty Years of Fiat: A Lament
August 15th, 2011
The decline of the value of the US dollar since the end of the gold standard in 1971.
August 15, 1971…a date which will live in infamy. Behind closed doors and under a cloak of silence, President Nixon and his trusted team of Treasury officials and economic advisors decided on one of the most dramatic economic moves in American history….remove the dollar from the gold standard. The decision came at a time of economic uncertainty, and an impending $3 billion gold buy by Great Britain, in an effort to make the dollar more flexible and avert economic panic in the future from potential gold shortages. Little did they know that this fateful day would gave rise to four decades of inflation, greed, and economic hardship.
The notion back then was that money meant wealth, and a free currency would make Americans more wealthy. According to economist Warren Brookes, this is a false assumption, often dubbed the “money illusion” because money is not an indicator of a nation’s wealth. In Mr. Brooke’s case, wealth is defined as the quality of one’s labor, and what is produced through it, hence material wealth. The role of money is the “middle man” in an economy. It’s a commonly held item of wealth that is exchanged for goods people need. Since swapping goods directly is difficult and cumbersome, a money system makes trade easier. Gold was the most valuable asset people had, so for millennia, that was the standard for most of the world’s paper currency.
When President Nixon pulled us off the gold standard, he didn’t realize that while the dollar became a floating currency, gold was still a stable indicator of the price of goods. One comparison is looking at the value of gold against the price of oil, one of the most in-demand commodities today. In 1971, gold stood at $35/oz., which would buy you roughly 15 barrels of oil at $2.30 each. As the dollar rapidly declined in the decade after the decision, the prices of gold and oil rose, yet the comparison between the two goods remained constant. In 1981, gold rose to $480/oz, but one ounce could still buy 15 barrels of oil at $32 each. Today, gold is at nearly $1800/oz, which can now buy 20 barrels of oil at $85 each. Using that as an indicator, it is realistic to believe that oil is due for a price hike in the near future, but it can be argued that if we maintained the gold standard, which is mandated by the constitution (Article 1, Sec. 8 & 10), oil would be worth the same as it was 40 years ago, and the oil crises probably would not have occurred.
By removing the United States from the gold standard, President Nixon made the mistake of thinking that the dollar could be more flexible and more accessible. In truth, the free flow of money lead to the dollar’s rapid decline in value, as investors turned to more stable forms of investment like gold, silver, and even rare stamps. The dollar as a stable currency ceased to be, and lead to the dangerous notion that you can print your way out of your problems now. Maybe you can, but then you’re left with pieces of paper that are worth less and less as gold prices go up and up. Nixon made that mistake 40 years ago, and we’re seeing the after affects of it today.
