SMI Visitor's Blog       

Welcome to the SMI Visitor's Blog where you'll find selected excerpts from our Member's Blog, plus occasional posts created especially for our visitors.

For SMI Web Members, click here to go to the SMI Member Blog.

« Blog Home

Nixon and the gold window

I won't belabor this topic, as I know monetary policy discussions can quickly become tedious. But I thought I'd point those who are interested in reading more to a few additional resources.

* It was one of those seminal moments whose significance has only gradually become apparent, obscured as it was at the time by Vietnam and then Watergate. But the more one examines economic history, the more obvious it is that this was one of the most important policy decisions in modern history. (Edmund Conway writing in The Telegraph)

* In their impossibly good book Money, Markets, and Sovereignty (2009), Benn Steil and Manuel Hinds make the point that over the last four thousand years, the only period in which humanity has not consistently based its currency in metal, specifically gold, is the last forty. That’s right. Ever since President Richard M. Nixon announced forty years ago today, on August 15, 1971, that the U.S. would no longer officially trade dollars for gold, we have been enjoying a new era of human history. (Brian Domitrovic for Forbes)

* The most notable change occurred with the value of dollar-denominated assets. Gold has served as money for thousands of years precisely because it has a constancy of value to it but, unhinged from the "golden constant," the dollar went into free fall.

As is well known now, though the dollar bought roughly 1/35th of an ounce of gold in 1971, today it buys less than 1/1750th. It gets interesting, however, when we notice just how little some things have changed in the last forty years.

Indeed, as Brookes calculated in his essential book The Economy In Mind, "In 1970 an ounce of gold ($35) would buy 15 barrels of OPEC oil ($2.30/bbl). In May 1981 an ounce of gold ($480) still bought 15 barrels of Saudi oil ($32/bbl)." Fast forward to the present, and an ounce of gold ($1750) buys roughly 20 barrels of oil ($85)... (John Tamny for Real Clear Markets)

Reading all these 40th anniversary pieces, several points become clear. One, the Bretton-Woods system was unraveling and was unsustainable in its current form. From 1960 to 1971, America's gold reserves had been cut in half, to roughly $10 billion. Britain was asking for a guarantee on $3 billion in dollars. Something had to change.

Unfortunately, rather than reform the system, Nixon scrapped it. It's pretty clear he and his team had little idea what they were unleashing. As self-serving a politician as he was, I have a hard time believing that even Tricky Dick ever imagined his 1971 dollar would be worth just 18 cents a short four decades later.

These articles offer a healthy sense of perspective. It's only been 40 years since we left the stability of a gold standard (in some form) behind. Yet many parties act as though a return to some sort of gold tie is impossible — an antiquated fantasy. Not so.

If all this discussion has whetted your appetite but you're looking for more of a basic primer on the topic, SMI's special 22-page report, Inflation History: The Rise and Fall of the U.S. Dollar, is a great place to start. And if you're thirsty for more, our recently released Gold as an Investment: Will Precious Metals Continue to Shine? report makes a great companion piece to the inflation report. Best of all, these reports are FREE. To request these or any of our other special reports, visit our free downloads hub.

And speaking of gold, I was recently the guest on the nationally syndicated radio program MoneyWise with Howard Dayton. Give it a listen. And I would love your feedback.

7 Key Principles for Christian Investing

IRAs, 401(k)s and Social Security: A Retirement Planning Primer

Gold as an Investment: Will Precious Metals Continue To Shine?

Inflation History: The Rise and Fall of the U.S. Dollar

Posted by Mark at 2:51 PM | Comments (0) | TrackBack
Category(s): Inflation Watch
Tag(s): gold, inflation, market uncertainty

Email this post

Share |

Powered by Movable Type  |   Subscribe  |   Email Updates