The incumbent president is fond of blaming the economic situation on his predecessor, George Bush, but Roger Lowenstein says the blame should go back much farther.
He penned an article for Busniessweek.com titled The Nixon Shock which lays out the behind-the-scene details that led to Nixon's action to disconnect the dollar from gold in 1971, an action Mr. Lowenstein contends played a major role in getting us to the current economic situation.
Lowenstein provides the background. Arthur Burns warned Nixon in 1960 that the Federal Reserve's tightening efforts could result in a Kennedy victory over Nixon in the Presidential election. Nixon lost that election but cemented his respect for Burns. Nixon eventually won the Presidency in 1968 and promptly named Burns Chairman of the FED. Then, according to the story, Nixon was so afraid of the political implications of a faltering economy that he applied relentless pressure on Burns to keep the economy juiced even as inflation became a major concern.
“You see to it,” Nixon said. “No recession.”
But by the end of 1969, Nixon's first year in office, Burns kept a tight grip on the money supply in an effort to battle inflation which was at 6%, a very high rate for the time. Nixon was not happy. The economy weakened, but inflation remained -- a recession with inflation -- a situation which defied the prevailing economic theories.
However, by 1971 the economy seemed to be getting a little better, and with Nixon breathing down his neck, Burns let the money supply grow. This made inflation worse as exemplified by union demands for 30% pay raises over a three year period.
Foreign countries were facing the same inflationary problems in addition to the problem of having accumulated too many dollars in an effort to beef up the dollar to honor the Bretton Woods agreement which fixed the currencies of 44 countries to the dollar with each dollar redeemable in gold at a fixed price of $35 per ounce.
As more holders of dollar exchanged them for gold, the U.S. gold supply shrunk to the point that the U.S. wouldn't have been able to face a run on gold. Burns thought they should adjust the price of gold to make it worth more in dollars. But he lost the argument.
On August 12, 1971, Nixon summoned his team of 15 economic advisers to meet at Camp David to hammer out a plan. What they came up with was wage and price controls, an import tax, and an end to the U.S. commitment to exchange gold for dollars.
The Bretton Woods agreement was dead, and gold and foreign currencies floated freely and sometimes wildly. However, the wage and price controls worked long enough to get Nixon reelected in 1972. He eventually resigned in 1974 by which time the inflation rate was at 11%. By 1978 inflation had reached 15% when Carter appointed Paul Volker as FED chairman. Volker was independent enough to hike interest rates enough to eventually snuff out the runaway inflation the world economies had faced up to then. Of course, a recession followed. But the runaway inflation was stopped.
Lowenstein ends with this:
[In 1978 Burns said in a speech] that central bankers around the world were failing because elected leaders were unwilling to risk displeasing constituents. The new Fed chief, Volcker, did tame inflation; unlike Burns, he had the fortitude to subject the country to a brutal recession. But the dilemma faced by Burns—how to withstand the demands of the public for limitless monetary expansion—did not go away. We see it now in the troubles of nations from Greece to Ireland to the U.S. And the anguish that Burns felt is Ben Bernanke’s unfortunate inheritance.
Blame Nixon. And weak FED chairmen.
Lowenstein provided an excellent history lesson and made some good points. People have warned against fiat money for decades. But what kind of shock would result if our government attempted to return to a gold standard? And is that even possible today?
The most famous proponent of a return to the gold standard is Ron Paul who quipped just the other day that a silver dime would buy a gallon of gasoline. You know, he just might be right. At a weight of about .08 ounce and a price of silver of $41.60 per ounce a silver dime would be worth right around $3.33.
Can't get enough of Roger Lowenstein? Watch him discuss his article on CSPAN.
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