Fifty Years Ago: Ending the Gold Standard as Setting the Price of a Dollar – Cui Bono?

Fifty years ago, President Richard Nixon ended the gold standard so that the market value of a dollar was no longer tied to a fixed price for gold, but only to whatever price the market was willing to pay.  Since then, the dollar was only a fiat currency, having only the government’s order that it could be used as legal tender to support its value and subject to government decisions as to how many dollars would be in circulation.

According to one commentator:

With inflation on the rise and a gold run looming, Nixon’s administration coordinated a plan for bold action.  From August 13 to 15, 1971, Nixon and fifteen advisers, including Federal Reserve Chairman Arthur Burns, Treasury Secretary John Connally and Undersecretary for International Monetary Affairs Paul Volcker (later Federal Reserve Chairman), met at the presidential retreat at Camp David and created a new economic plan.  On the evening of August 15, 1971, Nixon addressed the nation on a new economic policy that not only was intended to correct the balance of payments, but also stave off inflation and lower the unemployment rate.

The first order was for the gold window to be closed.  Foreign governments could no longer exchange their dollars for gold; in effect, the international monetary system turned into a fiat one.  A few months later, the Smithsonian agreement attempted to maintain pegged exchange rates, but the Bretton Woods system of fixed exchange rates for currencies ended soon thereafter. The second order was for a 90-day freeze on wages and prices to check inflation.  This marked the first time the government enacted wage and price controls outside of wartime.  It was an attempt to bring down inflation without increasing the unemployment rate or slowing the economy.  In addition, an import surcharge was set at 10 percent to ensure that American products would not be at a disadvantage because of exchange rates.

Shortly after the plan was implemented, the growth of employment and production in the U.S. increased.  Inflation was practically halted during the 90-day wage-price freeze, but would soon reappear as the monetary momentum in support of inflation had already begun.  Nixon’s new economic policy represented a coordinated attack on the simultaneous problems of unemployment, inflation and disequilibrium in the balance of payments.

Since then, the federal government – Congress, President, Treasury and the Federal Reserve – have flooded our economy with trillions of dollars.  To whose benefit?

Consider these facts:

Currency in circulation per person has ballooned:

Source: Federal Reserve Bank of San Francisco

The assets held by the Federal Reserve, a mark of the amount of liquidity the government has provided to the private sector, have ballooned, as well:

The amount of money provided to the economy by the Federal Reserve, measured as M2, increased, as well, after 1980:

The spending of the federal government not covered by revenues (deficits) have also hit new highs.  Federal government debt is money added to the economy through expenditures:

Who has benefited most from having access to all this money created by the government?  Mostly those who own financial assets.  Consider the rising value of the stock market.  Those who have benefitted from rising prices for financial assets are those who were able to invest in stocks, bonds, options, etc.:

Government creation of liquidity has helped float the top 10% and especially the top 1% of Americans to possession of more and more wealth:

Since 1971, incomes for the top 5% and 20% of Americans have grown much more than the earnings for all the other families:

The global growth of central bank assets has similarly contributed to a floating of the boats of the wealthy around the world: