45 years ago today, on August 15, 1971, President Richard Nixon officially closed the gold window. While US citizens had been forbidden from owning gold or from redeeming their gold certificates for gold coins since the early 1930s, foreign governments still had the privilege of redeeming their dollars for gold. Due to the Federal Reserve’s inflationary monetary policy during the 1960s, foreign governments began to redeem more and more dollars for gold. Attempts to encourage other governments (especially France) not to redeem their dollar holdings were unsuccessful, and there was a very real threat that US gold holdings might eventually be exhausted. So President Nixon decided to close the gold window, thus severing the final link between the US dollar and gold. The removal of the restraint of gold redemption freed the Federal Reserve to engage in more inflationary monetary policy than ever. The effects of that on money supply and official price inflation figures are readily apparent.
Consumer Price Index
M2 Money Supply
The demonetization of silver in the Coinage Act of 1873 was widely assailed by its critics as the “Crime of ’73.” Isn’t it about time that Nixon’s closing of the gold window be known as the Crime of ’71?
Mount Washington Hotel, site of the Bretton Woods Conference. Image: Richard Hicks
In the aftermath of World War II, the United States cemented its position as the world’s largest and most powerful economy. The new international monetary order created at Bretton Woods, New Hampshire in 1946 was based in part on the gold-exchange standard of the 1920s, only with the dollar as the sole international reserve currency—since it was as good as gold. All countries tied their currencies to the dollar at fixed exchange rates, with the dollar being defined as FDR had left it, at 1/35 ounce of gold (i.e. $35 per ounce of gold). While individuals in the United States were still unable to own gold or to redeem their dollars for gold, foreign governments were able to cash in their dollars to the U.S. government and receive gold in return, a process that became known as the “gold window.” While the United States would pyramid its dollar issue on top of its gold reserves, other countries were supposed to hold dollars, and not gold, as their primary foreign exchange holdings.
Taking a look at this chart of the Dollar/Yuan exchange rate, you can understand why the Chinese government took the action that it did. The chart is denominated in yuan to dollars. The more yuan per dollar, the weaker the yuan and the stronger the dollar; the fewer yuan per dollar, the stronger the yuan and the weaker the dollar. You can see that the yuan has been continuously strengthening over the past ten years. Remember that as a currency strengthens, exports from that country become more expensive. A good that cost 100 yuan back in 2005 would mean a dollar cost of a little over $12. A 100-yuan good today would cost over $16. That’s why the Chinese government originally tried to keep the yuan pegged to the dollar, so as not to make the exports it relied upon for economic growth more expensive abroad. But after much pressure from the US and other Western countries, the government depegged the yuan, allowing it to trade in a narrow band and appreciate against the dollar.
After news broke of the United Kingdom’s decision to join the Chinese-backed Asian Infrastructure Investment Bank (AIIB), the United States was quick to react angrily to the UK’s actions, complaining that the UK was constantly accommodating China. Now Germany, France, and Italy have decided to join the AIIB as well. How will Washington react? Is this a shift away from the United States and towards China?
The New York Times reports that American prosecutors, in the wake of the decision against French bank BNP Paribas, have shifted their attention now towards German banks. Just as in its conduct of foreign policy, the U.S. government fails to appreciate the concept of “blowback” in its heavy-handed treatment of foreign banks.