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Richard Nixon Ends Gold Standard – 46 Year Anniversary

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46 years ago today Richard Nixon ended the dollar’s link to the gold standard. During an episode of Bonanza, Nixon made a surprise announcement on network television to tell the world that the dollar was no longer redeemable for gold. Effectively, he ended any sort of backing to the world’s reserve currency.

Following the collapse of the London Gold Pool and LBJ’s “Guns and Butter” programs, the investment world was redeeming their dollars in exchange for gold. So Nixon’s solution was to cut any sort of backing. He also instituted a set of price controls, really the antithesis of any sort of free market.

The effects are still being felt today.

Eventually after the stagflation of the 1970’s, gold and silver prices spiked in 1980. But former Federal Reserve chairman Paul Volcker raised interest rates to 20%, which settled the market and gave the U.S. Government the opportunity to correct its past behavior.

Unfortunately the government has just amassed more and more debt in the decades since, and now has seemingly passed the point of no return. If Volcker had to raise interest rates to 18% back in 1980, what interest rate would it take today to undo 8 years of 0-1% interest rates today? Not to mention an additional $4 trillion of asset purchases by the Federal Reserve, as well as all of the debt (and now even stocks) that foreign central banks have been buying with their own printed money.

So much of the current financial infrastructure is based on low interest rates, that raising rates even to 4-5% would like trigger a cascade of defaults. And how would the U.S. Government fit the additional interest expense into its budget?

It can’t. Just like it can’t afford much of the other money that it’s been spending. Which is why Nixon’s experiment is coming to an end, likely sooner than later.

My personal guess is that by the 50th anniversary the financial world looks a lot different. With gold and silver prices both multiples higher.

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