Gold Standard or Nixon Standard
by Gary North: My
Lesson from Los Angeles' Forgotten 1962 Riot
August 15, 1971, Richard Nixon unilaterally brought to an end the
last trace of an experiment in international monetary affairs that
stretched back over a century. He announced that the United States
government would no longer abide by the 1944 Bretton Woods agreement
to deliver gold at $35 per ounce to any government or central bank.
What he abolished
was not a gold standard. It was a government promise standard.
There was never a gold standard in the nineteenth century or early
twentieth century. It was always a government promise standard.
It was as reliable as government promises.
always announce and defend by monopolistic violence their legal
sovereignty over money. They say that they will control the terms
of exchange. All monetary standards are based on government promises
and IOUs called government bonds. These contracts are always broken
by governments. The only major exception in history was Byzantium
for about 800 years, beginning in the early fourth century under
the emperor Constantine.
destroyed was called the gold-exchange standard. It was first
adopted by governments at the Genoa Conference of 1922. It was an
agreement to avoid returning to the pre-World War I gold coin standard,
which had been independently but almost simultaneously revoked by
European governments when war broke out in August. They all then
resorted to monetary inflation. This was a way to conceal from the
public the true costs of the war. They imposed an inflation tax,
and could then blame any price hikes on unpatriotic price gouging.
This rested on widespread ignorance regarding economic cause and
effects regarding monetary inflation and price inflation. They could
not have done this if citizens had possessed the pre-war right to
demand payment in gold coins at a fixed rate. They would have made
a run on the banks. Governments could not have inflated without
reneging on their promises to redeem their currencies for gold coins.
So, they reneged while they still had the gold. Better early contract-breaking
than late, they concluded.
banks collected the gold held by commercial banks for their depositors.
Then the governments legalized this breaking of the contracts by
commercial banks with depositors. It was a sweet deal for commercial
banks, central banks, and governments. A country music song seven
decades later summarized the economics of the arrangement from the
depositors' point of view: "She got the gold mine. I got the shaft."
What was the
gold exchange standard? It was a post-war attempt by governments
to retain central bank autonomy, but still keep monetary inflation
under control. Germany, Austria, and Hungary had all adopted policies
of hyperinflation which would go on until the end of 1923. The governments
adopted a pseudo gold standard. It allowed central banks to buy
the IOUs of Great Britain and the United States and be paid interest.
These IOUs functioned as if they were as good as gold. Great Britain
and the United States guaranteed to deliver gold bullion at fixed
rates. They maintained convertibility to central banks. The other
central banks did not promise convertibility with their citizens.
So, they could issue IOUs to their own domestic investors without
fear of a gold run by citizens. Only central banks were allowed
to make a run on banks, namely, the Bank of England and the Federal
the chance of gold runs. Only Americans could make bank runs on
gold in the form of demanding gold coins at a fixed price of $20.
England re-established convertibility in gold bullion only in 1925.
This kept citizens from demanding gold coins. It reneged on this
in 1931. Then Roosevelt in 1933 reneged. He forbade gold ownership
by American citizens and residents of the United States. Then in
1934 he hiked gold's price from $20 to $35. He let central banks
and governments make runs on gold bullion held by the U.S. government.
Nixon ended the arrangement in 1971.
1914 until 1971, we see a trail of broken contracts by governments
with their citizens and then with each other. Each step expanded
the ability of central governments to impose the inflation tax on
its citizens and on any foreign investors holding government IOUs.
No government or central bank deliberately shrank the money supply
after 1914. Bank failures, 1930-33, shrank domestic money supplies,
but this was not central bank policy anywhere.
The gold standard
was always a government promise standard. Governments broke their
promises as a matter of policy after August 1914.
want autonomy. This means autonomy from their citizens. Citizens
exercised control in two ways before 1914: voting (limited franchise)
and gold coin ownership (wide franchise). They were allowed by law
to turn in domestic money and receive gold coins at a fixed price
per ounce. This was tolerated by governments until World War I broke
out. Then, invoking patriotism, they reneged. Having removed the
power of monetary redemption from the broad mass of residents
not always eligible for the franchise politicians never restored
this power to the public. Governments enforce autonomy over money
because they want autonomy from the public.
public never has figured this out. Voters do not demand that governments
cease exercising monetary sovereignty. Neither do political theorists.
Neither do most economists. Only Austrian School economists demand
this. They are a tiny minority.
since World War I have tolerated a series of broken promises by
governments regarding convertibility into gold coins at a fixed,
government-guaranteed price. The governments have steadily removed
any power of citizens to impose limits on the central banks' ability
to increase the money supply. Today, the only people who have prevented
Federal Reserve inflation in 2008 and 2011 from becoming hyperinflation
are commercial bankers, who have increased their holdings of excess
reserves at the Federal Reserve. The public has no voice in this
MARKET GOLD STANDARD
market gold standard should be the result of two legal arrangements:
(1) open entry into the money business, (2) the enforcement of contracts.
Gold would become one common currency. So would silver, if history
is a guide. The government would get out of the money business altogether.
It would claim no unique authority over money. It would decide the
monetary unit in which to collect taxes nothing more. It
would enforce contracts, meaning lawful voluntary exchanges in which
no fraud is involved.
would decentralize and privatize money creation. It would also privatize
and decentralize the fraud of counterfeiting. It would pit bankers
against bankers, who would participate in bank runs against suspected
banks. It would decentralize the enforcement against fraud.
monetary sovereignty from governments, this arrangement would permanently
keep fraud from becoming centralized and a matter of law. It would
keep the fox of government away from the chicken coop of money creation.
It would make impossible any replay of the string of broken contracts,
1914 to 1971, which marked the government promises standard which
masqueraded as a gold coin standard, then a gold exchange standard,
then a Tricky Dick Nixon standard.
proposes a monetary reform that involves government control over
money, keep this picture in mind:
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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