It’s not very well known, but for much of the U.S.’s existence the dollar was linked to gold without any significant stock of gold as backing. This was logical. David Ricardo was clear that a gold standard realistically required no gold in vaults. So long as market actors respect the standard, and commitment to same among monetary authorities, massive of amounts of gold for redemptions would be unnecessary.
The source of the U.S.’s large gold holdings was Franklin Delano Roosevelt. As is well known, private holdings of the yellow metal were confiscated in the 1930s. It was that kind of decade….
This is worth bringing up as a response to a myth about U.S. dollar policy that just won’t die. It’s the one about what caused President Nixon to sever the dollar’s link to gold in 1971. To this day, conventional wisdom indicates that Nixon’s shaky hand was somehow forced. With the U.S. running up “deficits” that were a consequence of the war in Vietnam combined with a domestic “War on Poverty,” dollar holders the world over no longer trusted the greenback’s 1/35th/ounce peg to gold. The world was awash in dollar income streams from Treasury debt, and with redemptions of dollars for gold rising, Nixon had to close the gold window. It’s nice history, but it’s also complete nonsense.
To see why, consider what investors are buying when they purchase Treasuries: they’re buying future income streams in dollars. That they are is a more than subtle hint that the countries most capable of running up debt are the ones that can also claim credible money. Love or hate gold, no reasonable person would suggest that money redeemable for a fixed amount of gold would turn off buyers of fixed income securities paying out that kind of money.
Applied to the 1970s, the notion that a gold-defined dollar would have somehow limited U.S. borrowing meant to fund a two-front “war” defies basic common sense. As opposed to limiting the borrowing ability of Treasury, the dollar’s gold definition logically enhanced it. This isn’t a comment on the good or bad of deficits, and it’s certainly not a call for more of the hideous tax that is government spending. It’s merely a comment that the dollar’s gold definition certainly didn’t exist as a barrier to “guns and better.” If anything, it made the possibility of two errant government “wars” even more realistic. And not just because income streams of quality money are more attractive to investors.
Good money is a sign of abundant growth precisely because it doesn’t exist as a barrier to trade. Trusted money is an enabler of work specialization simply because it enables lots of trade itself. When we can “import” all the goods and services we need and want, but that we’re not skilled at producing ourselves, we have the best odds of doing the work that’s most commensurate with our skills. And when we’re doing what we do best, we’re logically much more productive. In short, good money is economically stimulative for it enabling the trade that relentlessly propels the individuals who comprise any economy to their most specialized place within an economy.
Considering all of the above through the prism of country debt, it’s not just that credible money renders the debt of the country issuing credible money much more attractive. It’s also true that country debt is made most attractive by the individuals who will ultimately be paying it off. In other words, rich countries can run up a lot more debt than poor ones. A statement of the obvious, as is it a statement of the obvious that countries with stable money tend to be quite a bit more prosperous than countries that lack it. Love or hate “guns and butter,” a dollar with value defined by the world’s most stable commodity in no way imperiled or limited the U.S.’s wars; thus raising the question why President Nixon so foolishly severed the dollar’s commodity link.
The obvious answer is economists. Left and Right. Monetarists had Nixon convinced that we would be better off if PhDs planned the so-called “supply” of dollars, as opposed to dollar “supply” taking care of itself in market-driven fashion. Monetarists had also spread the absurd myth that gold had somehow restrained “money supply” in the 1930s on the way to the Great Depression. Except that capital knows no borders. Translated, the Fed couldn’t control the supply of money and credit inside the Marriner Eccles Building, let alone the United States.
The main thing is that economists were only too happy to seize control of dollar policy from a “commodity.” Gold was so low rent, don’t you know. “Trained economists” should handle money. And so they did. That Nixon didn’t understand economics is a waste of words. Confused, Nixon was very easily duped by economists who convinced him that monetary machinations would create prosperity by….one guesses magic.
Oh well, Nixon was promised Nirvana only to get inflation. That’s what happens when a currency is deprived of a standard. Let’s just be clear that Nixon was in no way forced to do something idiotic. Economists convinced him. If he’d chosen, he could have re-stated the U.S.’s commitment to a dollar defined as 1/35th of a gold ounce, at which point redemptions of dollars for gold would have ceased.