Unless one has studied the history of gold, money and the monetary system of the last 120 years or so you will know little about Sunday, August 15, 1971. Even if you have a higher education degree in economics or finance it is not certain that you will either or if you do know about the date I venture to say that you might not think it was a significant milestone in monetary or world history for that matter. So what happened on that fateful Sunday back in 1971?
Having read my previous articles here you might know by now that just prior to the end of World War II in 1944, the major movers and shakers in banking and government for the Allied Powers met at Bretton Woods in New Hampshire to draw up a new monetary system for the post-war world. That system put the United States dollar in a pre-eminent role as the Americans held most of the world’s gold reserves. From 1944 onwards any country that had a surplus of dollars in reserves at their Treasury or Ministry of Finance could knock at the U.S. Treasury’s door and convert $35 for one troy ounce of fine gold.
So, just over 50 years ago in August of 1971 President Richard Nixon interrupted the TV show Bonanza to announce on national television that the United Sates would break its promise from the meeting at Bretton Woods in 1944 and that from now on the Americans would suspend temporarily the convertibility of the American dollar into gold. This event is known as the closing of the Gold Window and is mostly overlooked in mainstream economics classes. I know this because I remember my economics professor mentioning this closing of the Gold Window in passing.
The repercussions of the closing of the Gold Window by President Nixon are being felt today everywhere around the world and will be felt for decades and if not centuries to come in my opinion. The reason for my thinking so is that prior to August 15, 1971 and for thousands of years prior, international trade among nations had been settle with gold and silver as these precious metals have been money and the ultimate extinguishers of debt or promissory notes. So by closing the Gold Window the U.S Treasury defaulted on its obligations to foreign countries.
As John Exter, a former American central banker, said in 1972 the American currency had now become ‘I O U Nothings”. From 1971 until today the U.S. government, with the help of the Federal Reserve (Fed/US Central Bank), has had no limit on how much it can spend as the currency printed by the Fed is not anchored by real money or gold. So the U.S. is the only country that does not have to earn its way in the world because the dollar is still the major reserve currency and with that currency that is created out of thin air it can buy anything it wants from the rest of the world. The rest of the world needs to earn dollars in order to pay for their imports not only from the U.S. but any other country in the world and especially for oil and that is why the post-1971 dollar has been known as the Petrodollar. The Petrodollar was set up in the 1970s when the U.S. helped Saudi Arabia set up OPEC and made a deal with the Saudis to protect that Kingdom militarily in exchange for the Saudis selling oil only in U.S. dollars.
Back in the 1970s the consequence of the Nixon Shock as was economic stagnation and high inflation throughout the world and the inflation was felt in the West well into the 1980s while in the poorer or less developed nations inflation has been a constant problem. The post-1971 dollar or fiat dollar was on its knees in 1980 and many thought it would not survive as gold and silver soared in prices. It was actually the dollar that was fast disappearing versus real money. It took the Federal Reserve’s Chairman, Paul Volcker, to allow interest rates to soar to 20% to save the fiat dollar. Americans and the rest of the world experienced one of the worst recessions since the Great Depression in the early 1980s.
There were attempts to put the dollar on a sound money or gold footing in the early 1980s but the political will was not there because politicians and many voters love government deficit spending and a free lunch. Many big interest groups like the military industrial complex, social welfare complex and Wall Street benefit from government deficit spending and easy money created out of thin air. This regime of fiat currency by the part of the major economic and military power has led to a mushrooming of debt, credit, financial crises, wealth inequality and speculation around the globe. There have been nations that have tried to get out of this Petrodollar or fiat currency system but their attempts were quashed by American military might. Think of Iraq and Libya. In Iraq Saddam Hussein declared that he would start selling oil for euros and we know what happened to him. In Libya Colonel Muammar Gadaffi was planning to set up the African gold dinar and we know what happened to him.
In 2021 though we are seeing major economic and military powers like China, Russia continue to accumulate large gold reserves and create their own methods of payment for international trade outside the Petrodollar. I would also say that the major Achille’s heel of the fiat dollar on non- convertible dollar is that the bigger the dollar system grows the more of a Ponzi scheme is becomes as the only way for the U.S. to pay its debts is by issuing more and more debt. In a fiat currency system it is impossible to liquidate debt because the currency is the debt. Prior to 1971 gold payment extinguished debt. Unfortunately, this is not just an American problem as the inflation the U.S. has been spewing out for half century has spread like a virus throughout the world as every country in the world has based its currency on the fiat dollar. The biggest symptoms of this American fiat dollar inflation are insurmountable amounts of debt worldwide, the evisceration of the middle class in the West, poverty in the less developed nation, wealth inequality, environmental damage from rapid economic development backed by inflation and brewing political and social instability in the U.S. and Europe.
What we need to remember is that the last 50 years have been an anomaly in the history of money and international trade and that Ponzi schemes always come unglued. The key question, of course, is when will the current system collapse and how will we know that it is doing so. I do not have a crystal ball but I would say this Ponzi is on its last legs and the canary in the coal mine will be a major mover higher in the price of real money or gold and silver and other hard assets not only in U.S. dollars but all other fiat currencies worldwide. The worst case scenario though would be the triggering of a major war by the people who have most to lose from the meltdown of the Petrodollar as that would help clean the slate and help set up a new system. Let’s prepare for the worst but hope for the best and peace.