Turmoil in the Second House – The U.S. Pluto Return (2021-2023) Part 3: History Rhymes (3)

Nixon Shock, The Aftermath

THE COST OF COMPROMISE

SHOCK WAVES FROM WASHINGTON

“…the dollar may be our currency, but it’s your problem…”
–Treasury Secretary John Connolly (Nitchter 2015)

Nixon’s announcement upended the international monetary system (Burns 2010), and caused mayhem in the currency markets. Countries that chose to hold their reserves in U.S. dollars suffered heavy losses and faced widespread economic turmoil. By mid-1973 the U.S. dollar had fallen by 25 percent on average, relative to the major Western currencies (Hammes and Wills 2005). “Shock waves from Washington’s decision to break the link with gold have rippled down the decades. The creation of the euro, the hollowing out of US manufacturing, the arrival of cryptocurrencies and the ability of central banks to print seemingly unlimited quantities of money can all be traced back to August 1971” (Elliott 2021).

I’m really very concerned about the way that things are shaping up politically in every one of these countries. Italy has a recession […] Germany has a recession […] we’re going to Moscow, but Japan is a mess. Western Europe is in a mess. We’ve given up our friends to our enemies.
—National Security Advisor Henry Kissinger, November 16, 1971 (Nichter 2015)

In December 1971, after months of negotiations, the Group of Ten (G-10) industrialized democracies agreed to a new set of fixed exchange rates in the Smithsonian Agreement. U. S. dollar was devalued by 8.5% against gold to $38 per ounce. Europeans revalued their currencies by a similar amount and Japan agreed to revalue Yen by 16.9%.

Dubbed “the most significant monetary agreement in the history of the world,” by president Nixon, the agreement was doomed from the start. On February 12, 1973, U. S. dollar devalued by another 10% to $42 per ounce of gold. Speculation against the dollar pushed other major currencies to float against the dollar and rang the death knell for the fixed rate exchange regime. Gold rose to $90 an ounce in mid-1972 and reached $195 by the end of 1974.

Gold Price (per ounce) in U.S. dollars, 1970-1976. Sources: FastMarkets, ICE Benchmark Administration, Thomson Reuters, World Gold Council. Courtesy of https://www.gold.org.

Inflation, stagflation, and Price control

Having talked until recently about the evils of wage and price controls, I knew I had opened myself to the charge that I had either betrayed my own principles or concealed my real intentions. Philosophically, however, I was still against wage-price controls, even though I was convinced that the objective reality of the economic situation forced me to impose them. …

What did America reap from its brief fling with economic controls? The August 15, 1971, decision to impose them was politically necessary and immensely popular in the short run. But in the long run I believe that it was wrong. The piper must always be paid, and there was an unquestionably high price for tampering with the orthodox economic mechanisms.
–President Richard Nixon, RN: The Memoirs of Richard Nixon

By all accounts, “Nixon’s economic package was a short-term success. Throughout 1972, the United States enjoyed the largest real growth (5.7 percent) and the lowest rise in consumer prices (3.3 percent) since the Johnson administration. Unemployment declined to 5.1 percent, and the American balance of payments deficit shrunk drastically from $29.8 billion in 1971 to $10.4 billion in 1972” (Nitchter 2015).

The 90-day wage and price control sought to “shield” the American people from the monetary shock and solve the inflation-employment dilemma. Such policy was supposed to allow the administration to maintain a loose fiscal policy without fanning inflation. However, inflation soon reignited after the election. In 1973 another round wage and price freeze failed to curb the inflation and was followed by stagflation.

When mandatory wage and price controls came to a complete end in 1974, the aftermath was far from pleasant. Energy shortages and high food costs contributed to an increase in inflation and to recession, and the pressure that built up after the period of controls lead into the destructive double-digit inflation that plagued the early months of the Ford administration. Three years after controls had complete [sic] ended, both unemployment and inflation hovered around 7 percent, and there was even nostalgia for the “good old days” in 1971 when we had only 4 percent inflation and 6 percent unemployment.
–President Nixon, RN: The Memoirs of Richard Nixon

Unemployment hit 9% in May of 1975. Inflation reached double-digit in 1974 and 1979. The U.S. dollar price for a barrel of oil rose from $3.35 in January 1970 to $32.50 by the end of the 1970s. The U.S. consumer price index rose by 106 percent during the 1970s. The high interest-rate that followed brought on the recession in the early 1980s.

Unemployment rage, Prime Loan Rates, and Consumer Price Index (CPI-U), 1968-1987

“The U.S. and other western countries struggled to cope with the inflationary shock. Corporate profitability suffered, encouraging firms to move their production plants to parts of the world where labour costs were cheaper. By the time the US started to take draconian steps to curb inflation at the end of the 1970s, Deng Xiaoping was launching the reforms that would turn China from an economic backwater into an industrial superpower. Fifty years after the collapse of the Bretton Woods system, China has emerged as a bigger threat to the US than the Soviet Union ever was”. (Elliott 2021)

The current official price for gold stock on Fed balance sheet is at $42.22 per ounce (as of October, 2022, source https://www.federalreserve.gov/data/intlsumm/current.htm). By the end of the 1970s, gold had risen 1200% to more than $455. The open market price in 2022 is between $2091 and $1621 (as of November 25, 2022).

*Gold price data as of November, 2022. Source https://www.gold.org/goldhub/data/gold-prices*

THE CANTILLON EFFECT

Income inequality has significantly increased since the late 1960s, coinciding with the onset of the great inflation and welfare expansion. Since the Nixon presidency, richest Americans has experienced the fastest income growth while the real household income stagnated.

One often-downplayed consequence of monetary expansion is recognized by Irish economist Charles Cantillon (1680-1734). Cantillon observed that when money supply expands, those closest to the source of new money benefits the most, because they can purchase assets before the inflation occur. Those farthermost from the source of new money suffer the most, because they will bear the burden of inflation before their wages catch up with the price increase.

In other words, when massive amount of new money is created, not only does it lead to inflation but also chooses winners and losers. In our modern economy, the money expansion by central banks favors government, large corporations (that lobby the congress), and investors of these corporations. The accumulated effect leads to Plutocracy (government by the wealthy, of the wealthy, and for the wealthy) and Plutonomy (concentration of wealth), and threatens democracy. This effect is demonstrated by the stagnant real median household income over the past decades while asset price soared with the cost of living. When politicians advocate the “multiplier effect” of loose monetary policy “for the poor,” they conveniently leave out the fact that such policy exacerbates income inequality and worsens economic conditions for savers, people on fixed incomes, and wage earners, whose income increase persistently fall behind the inflation.

Consider the following recent headlines that demonstrate the Cantillon Effect in action, and how it bestows power and spreads corruption through central bankers, government insiders, and investment firms:

The New York Times, September 27, 2021. https://www.nytimes.com/2021/09/27/business/fed-rosengren-kaplan.html

Defense News, March 9, 2022. https://www.defensenews.com/congress/2022/03/09/bidens-ukraine-aid-package-is-getting-super-sized-by-congress/

Politico, April 11, 2022. https://www.politico.com/newsletters/politico-influence/2022/04/11/business-booming-for-hunter-biden-linked-firm-00024459

Reuters, April 29, 2022. https://www.reuters.com/world/pelosi-hopes-pass-33-bln-ukraine-aid-bill-as-soon-possible-2022-04-29/

Reuters, August 8, 2022. https://www.reuters.com/world/europe/exclusive-us-send-45-billion-more-ukraine-budget-needs-2022-08-08/

Defense News, August 8, 2022. https://www.defensenews.com/opinion/commentary/2022/08/08/even-in-a-challenging-period-publicly-traded-defense-stocks-thrive/

Reuters, August 18, 2022. https://www.reuters.com/world/biden-administration-readies-about-800-mln-additional-security-aid-ukraine-2022-08-18/

Reuters, September 26, 2022. https://www.reuters.com/world/us/us-congress-negotiators-set-12-bln-new-ukraine-aid-2022-09-26/

Defense News, September 29, 2022. https://www.defensenews.com/congress/2022/09/29/republicans-push-biden-to-use-21-billion-ukraine-aid-set-to-expire/

The Wall Street Journal, Oct. 11, 2022. https://www.wsj.com/articles/government-officials-invest-in-companies-their-agencies-oversee-11665489653

Reuters, November 9, 2022. https://www.reuters.com/world/europe/biden-says-he-expects-ukraine-aid-continue-uninterrupted-2022-11-09/

Defense News, November 15, 2022. https://www.defensenews.com/congress/budget/2022/11/15/white-house-requests-38-billion-more-in-ukraine-aid/

BlackRock press release, November 16, 2022. https://www.blackrock.com/corporate/newsroom/press-releases/article/corporate-one/press-releases/blackrock-financial-markets-advisory-to-advise-ministry-of-economy-of-ukraine

Reuters, November 23, 2022. https://www.reuters.com/world/europe/us-authorizes-400-mln-new-military-aid-ukraine-2022-11-23/

The Wall Street Journal, November 21, 2022. https://www.wsj.com/articles/sam-bankman-fried-ftx-team-among-top-political-donors-before-bankruptcy-11668949205

The Washington Times, November 27, 2022. https://www.washingtontimes.com/news/2022/nov/27/hunter-bidens-dubious-business-dealings-raise-spec/

Reuters, December 6, 2022. https://www.reuters.com/world/us-lawmakers-authorize-800-million-more-ukraine-defense-bill-2022-12-07/

Reuters, December 9, 2022. https://www.reuters.com/world/biden-authorizes-new-275-mln-military-aid-ukraine-white-house-2022-12-09/

The New York Times, December 8, 2022. https://www.nytimes.com/2020/12/08/us/politics/lloyd-austin-pentagon-military-contractors.html

Bloomberg, December 12, 2022. https://www.bloomberg.com/news/articles/2022-12-12/ftx-bankruptcy-puts-73-million-of-political-donations-at-risk?sref=ZMFHsM5Z

Epoch Times, December 16, 2022. https://www.theepochtimes.com/more-than-80-cities-counties-using-federal-pandemic-aid-to-fund-guaranteed-income-pilot-programs_4927888.html

Reuters, December 21, 2022. https://www.reuters.com/world/europe/us-announces-185-billion-additional-military-assistance-ukraine-2022-12-21/

Bloomberg, December 29, 2022. https://www.bloomberg.com/news/articles/2022-12-29/bankman-fried-met-white-house-aides-in-pre-collapse-crypto-push?srnd=premium

Bloomberg, December 29, 2022. https://www.bloomberg.com/news/articles/2022-12-29/biden-signs-1-7-trillion-funding-bill-that-includes-ukraine-aid?srnd=premium

IS THIS TIME DIFFERENT?

Money Supply Growth and Inflation, 2015-2022. Source: https://www.atlantafed.org/blogs/macroblog/2022/08/31/can-1970s-help-inform-future-path-of-monetary-policy.aspx

There are two leading causes of inflation we’re seeing today. The first cause of inflation is a once-in-a-century pandemic. Not only did it shut down our global economy, it threw the supply chain and demand completely out of whack…
And this year we have a second cause — a second cause: Mr. Putin’s war in Ukraine.
You saw — we saw in March that 60 percent of inflation that month was due to price increases at the pump for gasoline.
Putin’s war has raised food prices as well, because Ukraine and Russia are two of the world’s major breadbaskets of — for wheat and corn — …

Normally — normally, we’d have already begun to export them into the market. … But it’s difficult because, again, of Putin and the Russian invasion of Ukraine.
– President Joe Biden, May 10, 2022

Housing Price Index and Consumer Price Indexes January 2020 – October 2022. Beginning of grey area indicates the start of Covid pandemic; end of grey area indicates the beginning Fed bond buying program (March 23, 2020-March 2022, including $87 billion in Treasuries and $34 billion in mortgage bonds); orange line indicates the start of Russian-Ukraine War (February 2022).

At the time of writing, the third and final conjunction of U.S. Pluto return is fast approaching. The difference between a Pluto trine in the 1970s and current Pluto return is that this time around, the transiting Pluto is both working for and against the U.S. The outward destruction and inner transformation –both constructive and destructive –work as one. The corruption (Pluto) in value (2nd house) is more intensified; so is the downfall and resurrection.

Pluto energy is both intensifying and transformative. Collectively, this energy rarely acts under freewill. What we’re presently witnessing (as of December 2022) is a strong and self-destructive force that will not quit until both fundamental change and significant collateral damage occur.

U.S.’s second house Pluto historically triggers money, currency and trade issue during important transits, this time is no different. Economists and market observers have come to the realization that the inflation/stagflation is resurfacing. This time, the Fed, caught between high inflation and high interest rate, is out of arsenals. “If the Fed runs down the SOMA (System Open Market Account. Fed’s asset portfolio containing the assets acquired and to be sold during open market operations) portfolio too much, they will break something in the market. If they don’t, we are stuck with inflation.” (Chavez-Dreyfuss 2022). Currently, the National debt to GDP ratio is at the highest since World War II. The debt servicing cost is at a steady up trend, and the treasury market liquidity is at crisis-level low.

Reminiscent of the great inflation of the 1970s, we are facing social and geopolitical tensions, overreaching government, volatile financial markets, and high inflation. In addition, we have unsustainable level of government and private debt, and a formidable geopolitical opponent to whom we continue to transfer funding, data, and advanced technology. In Nixon’s words: “the most formidable enemy that has ever existed in the history of the world” –China.

We won’t know to what extent and how this Pluto Return will manifest until the dust settles. If history is any guide, the inflation will not be transitory and the recession will not be shallow. Whatever temporary fix for structural problems will have long-lasting impact and unintended consequences.

It would be prudent to review major legislation and executive orders during the crucial Pluto return period (between March 2021 to December 2023). The policies that aim to solve long-term problems with political compromises –or worse, outright corruption –will not work as intended, and will likely carry pernicious consequences. It’s not too late to recognize the folly of our experts and officials, and the destruction the political class can inflict on our lives. The least we can do is to insulate ourselves as much as possible in the wake of their short-sighted and disastrous policies.

Federal government budget surplus or deficit (Green)
Government current expenditures: Welfare and social services (Blue)
Federal Government: National Defense Consumption: Expenditures and Gross Investment (Red)

Conservatives are always at a disadvantage when speaking about economics because their belief that some pain may be necessary now to save the patient later is conventionally interpreted by liberal politicians and commentators as “heartlessness” or “callous indifference to human suffering.”

It is unfortunate that the politics of economics has come to dictate action more than the economics of economics. Not surprisingly, when prudence clashes with political reality, the latter sometimes triumphs.
—President Richard Nixon, RN: The Memoirs of Richard Nixon

ADDITIONAL READING

REFERENCE

Abrams, Burton A. 2006. “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes.” Journal of Economic Perspectives, no. Volume 20, Number 4: 177–88. https://fraser.stlouisfed.org/title/journal-economic-perspectives-1167/richard-nixon-pressured-arthur-burns-evidence-nixon-tapes-2388.

Bordo, Michael D. 2018. “The Imbalances of the Bretton Woods System 1965 to 1973: U.S. Inflation, The Elephant in the Room.” NBER. National Bureau of Economic Research. December 2018. http://www.nber.org/papers/w25409.

Bordo, Michael, Eric Monnet, and Alain Naef. 2017. “The Gold Pool (1961-1968) and the Fall of the Bretton Woods System. Lessons for Central Bank Cooperation.” National Bureau of Economic Research. 2017. https://economics.ucdavis.edu/events/papers/copy2_of_417Bordo.pdf.

Bryan, Michael. 2013. “The Great Inflation .” Federal Reserve History. November 22, 2013. https://www.federalreservehistory.org/essays/great-inflation.

Butkiewicz, James L., and Scott Ohlmacher. 2021. “Ending Bretton Woods – The Economic Historian.” The Economic Historian. December 7, 2021. https://economic-historian.com/2021/12/ending-bretton-woods/.

Chavez-Dreyfuss, Gertrude. 2022. “Analysis: Nagging U.S. Treasury Liquidity Problems Raise Fed Balance Sheet Predicament.” Reuters. November 8, 2022. https://www.reuters.com/markets/us/nagging-us-treasury-liquidity-problems-raise-fed-balance-sheet-predicament-2022-11-08/.

Eichengreen, Barry. 2000. “From Benign Neglect to Malignant Preoccupation: U.S. Balance-of-Payments Policy in the 1960s.” National Bureau of Economic Research, March.

Elliott, Larry. 2021. “Rise of Cryptocurrencies Can Be Traced to Nixon Abandoning Gold in 1971.” The Guardian. August 15, 2021. https://www.theguardian.com/business/2021/aug/15/rise-of-cryptocurrencies-can-be-traced-to-nixon-abandoning-gold-in-1971.

Ferrell, Robert H. 2010. Inside the Nixon Administration: The Secret Diary of Arthur Burns, 1969-1974. University Press of Kansas.

Ghizoni, Sandra Kollen. 2013. “Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls.” Federal Reserve History. November 2013. https://www.federalreservehistory.org/essays/gold-convertibility-ends.

Ghosh, Atish Rex. 2021. “From the History Books: The Rethinking of the International Monetary System.” IMF Blog. August 16, 2021. https://www.imf.org/en/Blogs/Articles/2021/08/16/from-the-history-books-the-rethinking-of-the-international-monetary-system.

Ghosh, AtishRex. 2021. “Behind Closed Doors.” International Monetary Fund|Finance & Development. September 2021. https://www.imf.org/en/Publications/fandd/issues/2021/09/book-review-three-days-at-camp-david-garten.

Hammes, David, and Douglas Wills. 2005. “Black Gold: The End of Bretton Woods and the Oil-Price Shocks of the 1970s.” The Independent Review.

Hetzel, Robert L. 2013. “Launch of the Bretton Woods System.” Federal Reserve History. November 22, 2013. https://www.federalreservehistory.org/essays/bretton-woods-launched.

Humpage, Owen. 2013. “The Smithsonian Agreement.” Federal Reserve History. November 22, 2013. https://www.federalreservehistory.org/essays/smithsonian-agreement.

Lehrman, Lewis E. 2011. “The Nixon Shock Heard ’Round the World.” The Wall Street Journal. August 15, 2011. https://www.wsj.com/articles/SB10001424053111904007304576494073418802358.

Lowenstein, Roger. 2011. “The Nixon Shock.” Bloomberg Businessweek. August 4, 2011. https://www.bloomberg.com/news/articles/2011-08-04/the-nixon-shock.

The Washington Post. 2019. “How Paul Volcker Beat Inflation and Saved an Independent Fed.” Washington Post. December 10, 2019. https://www.washingtonpost.com/business/economy/how-paul-volcker-beat-inflation-and-saved-an-independent-fed/2019/12/10/7e58d7ae-1b64-11ea-87f7-f2e91143c60d_story.html.

Mandelman, Federico, and Brent Meyer. 2022. “Lessons from the Past: Can the 1970s Help Inform the Future Path of Monetary Policy?” Federal Reserve Bank of Atlanta. August 31, 2022. https://www.atlantafed.org/blogs/macroblog/2022/08/31/can-1970s-help-inform-future-path-of-monetary-policy.aspx.

Manly, Ronan. 2021. “British Requests for $3 Billion in US Treasury Gold – The Trigger That Closed the Gold Window.” BullionStar. August 16, 2021. https://www.bullionstar.com/blogs/ronan-manly/british-requests-for-3-billion-in-us-treasury-gold-the-trigger-that-closed-the-gold-window/.

Meltzer, Allan H. 2005. “Origins of the Great Inflation.” Federal Reserve Bank of St. Louis Review, March 2005.

“Milestones: 1969–1976 – Nixon and the End of the Bretton Woods System, 1971–1973.” n.d. Office of the Historian. Accessed November 15, 2022. https://history.state.gov/milestones/1969-1976/nixon-shock.

“Money: De Gaulle v. the Dollar.” 1965. Time, February 1965.

“Money Matters: An IMF Exhibit — The Importance of Global Cooperation | System in Crisis (1959-1971).” n.d. International Monetary Fund. https://www.imf.org/external/np/exr/center/mm/eng/sc_sub_3.htm.

New York Times. 1971. “Call to Economic Revival,” August 16, 1971.

Nichter, Luke. 2015. Richard Nixon and Europe. Cambridge University Press.

Nixon, Richard Milhous. 1978. RN: The Memoirs of Richard Nixon. Touchstone Books.

Nixon Tapes, Oval Office 570-44. 1971. 12:07-12:53 pm

Ohlmacher, Scott W. 2009. “Ths Dissolution of the Bretton Woods System, Evience from the Nixon Tapes, August-December 1971.” Honors Degree Thesis, University of Delaware.

Rand, Ayn. 1967. Capitalism. Signet. Gold and Economic Freedom by Alan Greenspan

Rothbard, Murray N. 2018. “The Monetary Breakdown of the West.” Mises Institute. March 7, 2018. https://mises.org/library/monetary-breakdown-west.

Strong, Bill, John Hathaway, and Stephanie Pomboy. 2021. “ ‘Nixon Shock’ 50 Years Later, Remembering the 1970s.” Sprott Insights. August 15, 2021. https://sprott.com/insights/video-nixon-shock-50-years-later-remembering-the-1970s.

“The Challenge of Peace: President Nixon’s New Economic Policy.” 2014. Richard Nixon Foundation. August 15, 2014. https://www.nixonfoundation.org/2014/08/challenge-peace-nixons-new-economic-policy/.

“U.S. Spent $141‐Billion In Vietnam in 14 Years.” 1975. The New York Times. May 1, 1975. https://www.nytimes.com/1975/05/01/archives/us-spent-141billion-in-vietnam-in-14-years.html.

Wapshott, Nicholas. 2021. Samuelson Friedman: The Battle Over the Free Market. W. W. Norton & Company.

Yergin, Daniel, and Joseph Stanislaw. 1997. The Commanding Heights.

Turmoil in the Second House – The U.S. Pluto Return (2021-2023) Part 3: History Rhymes (2)

The Nixon Shock

Few days in modern economic history are remembered as a day of infamy like August 15, 1971, when President Richard Nixon suspended U.S. dollar’s convertibility to gold. The “Nixon Shock” permanently and fundamentally transformed U.S.’s economy and governance, its impact reshaped international trade and geopolitics.

Taking place during the Pluto trine (when transiting Pluto formed a 120° angle to the U.S. Pluto), this series of events played out along the path of political expediency and betrayal of principles, which were followed by pernicious effects. The result was the corruption of core values (Pluto in 2nd house): currency devaluation, economic recession, a tectonic shift of socioeconomic landscape, and the government’s increased control over personal freedom and prosperity – all signatures of U.S. Pluto transits.

The trine between two planets indicates both energies working in sync and in harmony. The influences materialize swiftly. Due to the lack of conflict, the natives can be careless and unaware. In the case of U.S. Pluto, the trine with transiting Pluto means the powerful, corruptive forces –both within and without—are working as one, unobstructed. What we observed was the compromise of core beliefs, broken promises, deceptions, and secrecy.

Policies made during U.S. Pluto transits often corresponded with the destruction of status quo and the expansion of federal government. The quick-and-dirty solution frequently leads to unintended consequences that work the opposite of the original intention, since Pluto’s pattern is also to ensnare and complicate. The impact of these policies does not fully materialize until years, even decades later. This episode is a cautionary tale of a politicized economy and its aftermath.

Consumer Price Index for all items for the United States (Blue)
Consumer Price Index: Food in U.S. City Average (Green)
Consumer Price Index: Energy in U.S. City Average (Red)
Median Sales Price of House in the U.S. (Purple)
Median family income (Gold)
1960 – 2022. Price in August (Q3) 1971 is indexed at 100

Transit Pluto trine U.S. Pluto (120-degree angle)

Effective periods:

November 4, 1969 – February 26, 1970

September 2, 1970 – October 27, 1970

March 12, 1971 – August 26, 1971

Exact dates: September 29, 1970; April 20, 1971; July 24, 1971

Themes:

Compromise of principle for political expediency
Financial crisis, inflation, and currency devaluation
Plutonomy (Wealth redistribution, disparity, and concentration)
Plutocracy (Expansion of government control. Government by the wealthy, of the wealthy, and for the wealthy.)
Trade wars and currency wars

THE BRETTON WOODS SYSTEM

In July 1944, near the end of World War II, delegates from 44 nations gathered at the Bretton Woods Conference to rebuild the international monetary system. United States dominated the post-war economy and its dollar emerged as the world’s reserve currency. The U.S. government agreed to back every dollar overseas with its gold reserve at $35 per ounce, and all other countries pegged their currencies to the dollar.

The Bretton Woods system became functional in 1958. Since U.S. owned over half of the world’s gold reserve, the system was stable for a time. Foreign countries continued to acquire dollars and spend on American industrial exports, and their U.S. dollars were saved in interest-bearing accounts rather than converted to gold (Lowenstein 2011).

U.S. Gold Stock and External Liabilities 1951-1975 (Bordo, Monnet and Naef 2018) https://economics.ucdavis.edu/events/papers/copy2_of_417Bordo.pdf

THE LONDON GOLD POOL

In order to provide dollars for international trade, U.S. ran a persistent balance of payment deficit (expenditure exceeding income) and redeemed overseas dollars in gold upon request. In 1961, the amount of outstanding dollar claims began to exceed the U.S. government’s gold reserve. The London Gold Pool was established to shoulder the burden of gold outflow with member nations and defend the $35 gold price.

The stabilization mechanism was not to last. The Federal Reserve shifted to an inflationary policy in 1965, violating the rules of the Bretton Woods System (Bordo, Monnet, and Naef 2017). In the same year, French president Charles De Gaulle led the charge to repatriate gold and subsequently withdrew from the London Gold Pool. Other countries followed suit and the gold run accelerated.

Unfazed, the U.S. government carried on its “benign neglect” policy, running ever-larger balance of payments deficits and increased spending on Great Society program and the Vietnam war. The Johnson administration (1963-1969) doubled the national deficit and flooded the world with dollars.

As the U.S. dollar became further overvalued and oversupplied, foreign central banks and traders accelerated their dollar-to-gold conversion. In 1966, foreign central banks and governments held over 14 billion U.S. dollars. The United States had $13.2 billion in its gold reserve, only $3.2 billion of which was available to cover foreign dollar holdings.

On March 14, 1968, the United States requested the London gold markets to halt trading amidst overwhelming demand; the two-week closure spelled the official collapse of the London Gold Pool. On March 18, the congress voted to eliminate the gold reserve requirement for Federal Reserve Notes –namely, the U. S. Dollar. The measure exacerbated the devaluation and damaged the U.S.’s credibility. (Bordo 2018)

A two-tiered gold system emerged in effort to shore up the U. S. dollar and contain gold’s surging price. Foreign central-banks pledged to stop trading gold on the open market and reaffirmed the $35 price among central banks. Gold price in the open market was left to float freely. Incidentally, American citizens had been barred from owning monetary gold since 1933. The U.S. Supreme Court ruled the gold confiscation was constitutional during U.S. Pluto and transiting Pluto opposition (forming a 180-degree angle) in 1935.

THE DOLLAR CRISIS OF 1971

What’s our immediate problem? We are meeting here today because we are in trouble overseas. The British came in today to ask us to cover $3 billion, all their dollar reserves. Anyone can topple us – anytime they want – we have left ourselves completely exposed.
—John Connally, Secretary of the Treasury (1971-1972), August 1971

The fiscal and monetary tightening in 1968 brought some relief to the gold outflow; it also caused the recession in 1970. Despite inflation nearing a two-decade high, Nixon was more worried about persistent high unemployment rates, fearing it would threaten his re-election victory. He relentlessly harassed and pressured Burns –through whisper campaigns, blackmailing and mixed messages –to accelerate money supply “vigorously and aggressively”. Starting in early 1971, Burns forwent his cautious stance and repeatedly slashed the Fed discount rate. Inflation and the run on the dollar resumed. In June 1971, gold in the open market rose above $40 per ounce.

In early August of 1971, United States lost $850 million in gold reserves in just one week. The French had called in over $1 billion in reserves in the a few weeks prior (after an $191 million purchase); the Germans and the Dutch were looking to call in some $200 – 250 million more. (Ohlmacher 2009)

The last draw came on August 12, when the British ambassador appeared before the United States Treasury and asked that $3 billion be converted into gold. That amounted to one quarter of the remaining U. S. gold reserves.

With the run on the dollar at an all-time high and Nixon administration unwilling to tighten, the Bretton Woods framework reached a breaking point. Nixon had wanted to hold off a decision until after the 1972 election, but was advised that doing so would risk hemorrhaging billions more from the gold reserves. To put an immediate stop to market speculation, Nixon’s advisors impressed upon him that the announcement must be made before the markets’ open on the next Monday, which meant broadcasting during the Sunday prime time.

SECRET CAMP DAVID MEETING

On the afternoon of Friday, August 13, 1971, President Nixon holed up with fifteen advisers and staff members at Camp David to confront the economic crisis. The course of action was set: all that was needed was a united front within the administration. Nixon was preoccupied with the short-term economic outcomes and how it would impact of his re-election in 1972 (Ohlmacher 2009); more time was spent discussing the timing and the presentation of the speech than how the economic program would work (Yergin and Stanislaw 1997). Despite of the policy’s enormous impact on international relations and global trade, no foreign policy advisors were invited. Federal Reserve chair Arthur Burns vehemently opposed the closing of the gold window, but he was marginalized and overruled.

Secretary of Treasury John Connally played to the president’s insecurity and advocated dramatic display of leadership. Having infamously said “foreigners are out to screw us … our job is to screw them first,” Connally convinced the president to bypass the Congress and plan in secret ahead of the European finance ministers’ meeting, which would release a joint statement on the United States’ role in the international financial crisis (Ohlmacher 2009).

We can stop convertibility very easily – by just saying so…The next thing is that you probably ought to float this exchange rate with the other currencies of the world. …We have a floating currency… We can take these steps without revaluing gold.
—John Connally, Secretary of the Treasury, August 1971 (Ohlmacher 2009)

Connally assured Nixon that he did not have to be the president who devalued the dollar, and advised him to conflate the closing of the gold window with a domestic policy package: “Whatever we do in the international field – it seems to me – ought to be coupled with action on the domestic front so that they tend to shield each other”. “Posture it as being competitive,” such action would have “no political downsides. At all. And a great deal of upsides”. (Ohlmacher 2009)

THE NIXON SHOCK (& LIES)

On the evening of August 15, 1971 president Nixon delivered a live, prime-time speech to outline his sweeping economic reform. In a broad stroke, Nixon proposed a 10 percent tax credit for business investment, repeal of the 7-percent excise on automobiles, and speeding up income tax exemption. He also ordered a cut in Federal spending and foreign aid, pay freeze, and downsizing government personnel.

By executive order, Nixon imposed a 90-day wage and price control to counteract inflation expectations. As his dramatic announcement seemingly drew to a close, Nixon segued into blaming international currency traders for unemployment and inflation, arguing for a strong dollar, trade competitiveness, decoupling from gold, and monetary stability in the same breath:

The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world.

In the past 7 years, there has been an average of one international monetary crisis every year. Now who gains from these crises? Not the workingman; not the investor; not the real producers of wealth. The gainers are the international money speculators. Because they thrive on crises, they help to create them.

In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy, and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interest of the United States.

Now, what is this action which is very technical? What does it mean for you? Let me lay to rest the bugaboo of what is called devaluation. If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today….

I am determined that the American dollar must never again be a hostage in the hands of international speculators.

I am taking one further step to protect the dollar, to improve our balance of payments, and to increase jobs for Americans. As a temporary measure, I am today imposing an additional tax of 10 percent on goods imported into the United States. …

As a result of these actions, the product of American labor will be more competitive, and the unfair edge that some of our foreign competition has will be removed. This is a major reason why our trade balance has eroded over the past 15 years.
–President Richard Nixon, August 15, 1971

With this announcement, U.S. unilaterally suspend the dollar’s convertibility into gold, effectively dissolved its international obligations and ended the Bretton Wood system. Nixon blamed “international speculators” for U.S. losing competitiveness and imposed a 10% tariff on all imported goods until a new international monetary agreement was made.

President Nixon has moved with startling decisiveness to stabilize the dollar and spur economic growth. … (He) has now provided the leadership which is even more essential than any specific proposal for turning the economy around and starting it back on the road to full employment, price stability and competitiveness in an open world market.
–The New York Times, August 16, 1971

The new policy was well-received by the media as well as Wall Street, with the S&P 500 booking the largest one-day gain of the year.

Richard Nixon by tonynetone. https://www.flickr.com/photos/tonynetone/2623748139/

POLITICAL EXPEDIENCY

… between now and the election in November [1972], there must be one paramount consideration. And that paramount consideration is not the responsibility of the U.S. in the world, it isn’t outgoing policy, it isn’t the fact that in foreign [policy] we’ve done this, that, or the other thing, the main thing is that we have to create the impression that the president of the United States, finally, at long last, after 25 years with blood, sweat and tears, is […] looking after its interests.
–President Richard Nixon, September 11, 1972

Back in 1968, Nixon campaigned on the promise to roll back President Johnson’s liberal agenda and expansionist policies. He presented himself as a free-market proponent in pursuit of gradual money contraction, inflation reduction, full employment, and balanced budgets. (Bordo 2018)

Believing that high unemployment rates had costed him his first presidential bid in 1960, Nixon’s mandate for the incoming Fed Chairman Arthur Burns was “no recessions”. (Bordo 2018) After the mild recession in 1970, Nixon declared “now I am a Keynesian,” abandoning his free-market stance and fiscal discipline. A loose monetary policy not only supported the domestic welfare programs and the Vietnam war, but also supported economic expansion resulting in an upward revision of economic indicators through the election season.

FALSE ENEMIES

Instead of correcting the monetary and fiscal policies, President Nixon successfully convinced the American people that the rest of the world was the problem: The surplus countries were blamed for devaluing their currencies and hurting the dollar’s competitiveness; currency speculators were blamed for the pressure to devalue the dollar. There was an unwillingness to recognize that the key source of the problem: U.S. inflation. (Bordo 2018)

By re-framing policy failure as a triumph and fresh start, Nixon succeeded in playing the role of a strong and decisive leader. He won the re-election in a landslide in 1972.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.
–Alan Greenspan (Federal Reserve Chairman, 1978-2006), 1967