They called it the Nixon Shock.
It was the day that then President Richard Millhouse Nixon, without
the consent of the Nations whose currencies had been governed since
1944 by the agreements of the Bretton Woods conference, removed the
US Dollar from the Gold Standard. It will prove to be the beginning of
the end for the United States Dollar and has ultimately had a large part
to play in what this story is actually about, the transfer of the value of
the US Dollar, and all currencies whose value is tied to the US Dollar to
the hands of an ever tighter circle of beneficiaries.
The closure of the gold window was traumatic and disagreeable to
the foreign holders of gold certificates that it undercut, but it was
welcomed in the U.S. with public fanfare at the time. The media had
made much political hay of the reports of the profits being realized by
foreign “price gouger” arbitrage traders who were capitalizing on the
fact that the U.S. was experiencing its first trade deficit in the 20th
century. Foreign holders of U.S. Treasury bonds sensed the valuechoking
effect that inflation in the U.S. economy, which was standing at
4.7% in 1969 when Nixon took the presidential oath of the office, was
having on the US Dollar.
The cost of the Marshall Plan for the reconstruction of twice-wartorn
Europe, the new mandates of The Great Society initiatives enacted
during the Lyndon Baines Johnson administration, and the cost of the
escalation of the war in Vietnam had compounded to expand the
National Debt. These budget deficits, combined with the climate of
social upheaval of the time, which was largely anti-war sentiment, had
continued to drive up inflation figures.
Nixon had been elected as a voice of reason by a war, and warprotest,
weary America. The Vietnam War had been the allencompassing
topic of national interest. The press had encouraged the
notion that Nixon had some sort of a secret plan for leading the US to
an “Honorable Victory” in Vietnam. In November of 1968, voters
endorsed the campaign button slogan “Nixon’s the One”, in a belief that
Nixon would keep his word and end the war. The press, particularly
certain print media seemed to derive great pleasure from knocking
Nixon off the pedestal they had put him on. In his first year in office, he
was bombarded with criticism for following the policies of his
predecessor Johnson, and escalating, instead of ending the war. To the
demise of his credibility, Nixon announced that the South-East Asian
conflict was metastasizing across the border into Laos and Cambodia.
This combined with other factors to create a slowly rising tidal wave
of economic pressures. Interest rates had not been this high since the
era of Reconstruction following the end of the Civil War. By the end of
Nixon’s first year in office, inflation had risen to 5.84% and there was no
top in sight. High interest rates were repeatedly fought to a stalemate
by soaring inflation. Foreign arbitrage of the Dollar continued and by
1970, the reserves of gold in the US treasury had plummeted to less
than 22% of the dollars they represented.
The Nixon shock was only the codification of what had been a long
term goal of central banking. The effort to remove the gold standard
had begun with the 1933 gold confiscation and subsequent devaluation
of the Dollar from its historic value of $20.60 per ounce of gold to
$35.00 per ounce. It is only because of gold’s value as money and the
fact that in 1933 other nations would not have accepted, what they
have today, which is worthless paper backed by nothing, that the gold
redemption window was open at all.
Since the 1933 confiscation act, it had been illegal for U.S. citizens
to hold gold, but not so for foreign investors. Federal Reserve notes
that were backed by gold, as well as mature Treasury bonds, could be
redeemed in gold. The increasing trend among international investors
who held assets in US Dollars had been to steadily redeem them from
the Treasury, which accelerated a precipitous decline in U.S. gold
reserves which, at least fractionally, still backed the USD.
Nixon faced relentless attacks in the press and by the Democratlead
Houses of Congress. In an attempt to out-posture the President as
“fighters of inflation,” the Democrat majority in congress conferred
Introduction August 15, 1971:The Day the Dollar Died 17
emergency powers to the Executive Branch, giving the President
authority to fix wages and control prices. Nixon, a proponent of limited
government favored what was called “New Federalism” (a belief in
limited central government), and attempted to help the economy by
devolving Federal power and returning block grant funds to the States.
It appeared to members of Congress that since Nixon was against
more central power, he would not use the new executive powers, and it
could be an on-going source of accusation that despite being given
ample opportunity, the White House was doing nothing to help the
worsening economy. By 1971, continued deficit spending had increased
the money supply, and the resultant inflated or “bad” money drove out
the “good” money as 22 billion US Dollars (that’s $22,000,000,000.00) in
gold reserves left the country in the first half of 1971.
Nixon then did what the Democrats in Congress least expected, and
picked up the gauntlet as challenged. On August 15, 1971, Nixon,
exercising the powers that had been dangled in front of him, declared a
90 day wage and price freeze, a 10% surcharge on all imports and the
closure of the Gold Window. Ending the convertibility of the US Dollar
for gold, as in taking the Dollar off of the gold standard, was essentially
a reneging by the US on its obligations under the established order, and
was effectively the end of the 27 year old Bretton Woods System.
Handing Over The Reserve Currency Baton
Named for the location of the Mount Washington Hotel in which it
was held, The Bretton Woods conference was convened July 1, 1944 to
find a common ground between the major economies of the world.
World War II was still raging as 730 delegates came together from the
44 allied nations. It was in anticipation of an allied victory that the
delegates to the conference hoped to establish a global financial order
which would regulate all aspects of international monetary policy.
The actual name of the meeting which lasted for 22 days in July of
1944 was the United Nations Monetary and Financial Conference, but
is commonly known as the Bretton Woods conference, simply because
it was held in Bretton Woods, New Hampshire. The ensuing Bretton–
Woods System was developed, which remained the status quo until it
essentially unraveled in the 1970’s with the Nixon Shock. The structure
of international finance and exchange rate management was set forth in
agreements made at the conference, including provisions for creation of
the International Monetary Fund (IMF), the International Bank for
Reconstruction and Development (IBRD), and the Global Agreement
on Tariffs and Trade (GATT).
The conference has been characterized as a struggle for control of
the world’s reserve currency between Great Britain and The United
States. The British delegation was headed by Lord John Maynard
Keynes who proposed the International Clearing Union (ICU) which
would have essentially been a central bank for the entire world. Keynes
proposed that the bank issue its own currency in the form of the Bancor
to which the value of all national currencies would be pegged. Keynes’
vision of a central bank included it having power to control the
disproportionate economic development of any individual nation.
Keynes believed that forced measures of economic redistribution on an
international scale would be the end of economic inequity, which he
viewed as the source of all war and conflict.
Keynes was also strongly motivated to direct the conference
proceedings so as to prop up Britain’s historic place of prominence in
world economics. England, as being the national home of the Pound
Sterling, then the reserve currency of the world, had enjoyed a long run
at the top of international finance. Following Wellington’s defeat of
Napoleon at Waterloo, the British Empire fully dominated the military
and economic landscape and the British Pound became the world’s
reserve currency. The Bank of England was the undisputed central bank
of the world.
Then came the combined forces of crushing debt from two wars and
British pursuit of interests in the Middle East, particularly oil interests,
following the institution of the British Commonwealth of Nations under
the 1926 Balfour Declaration after the end of WWI. England had slipped
from being a creditor nation to being deeply in international debt,
primarily to the U.S.
The United States had become the largest creditor nation in the
world at that time and as such, carried a lot of weight at the conference.
Refusing to be held to any limits on the growth of U.S. interests,
Introduction August 15, 1971:The Day the Dollar Died 19
regardless how disproportionate, the U.S. delegation, led by Henry
Morgenthau and Harry Dexter White vetoed the British proposals for
the Bancor and the ICU.
Keynes was also the strongest opponent to the dissolution of the
Bank of International Settlements (BIS) which had been formed after
WWI to facilitate payments of reparations from Germany to its victors.
The BIS was shown during the conference in evidence from the
‘delegation from Norway to be guilty of war crimes, specifically, that the
bank had helped Nazi Germany launder assets stolen from occupied
lands. The BIS had several Hitler appointees on its board of directors, as
well as prominent war profiteers such as Baron von Schroeder whose JH
Stein bank was a significant depository for Nazi held funds.
Keynes, together with representatives from Chase Bank argued in
favor of the BIS, which was supported by the international banking
contemporaries Montague Norman, who was the governor of the Bank
of England at the time and his German counter-part Hjalmar Schacht,
Adolph Hitler’s finance minister. Keynes’ attempt to retain Bank of
England access to stolen Nazi gold on deposit at the BIS was ultimately
outvoted by the U.S.-led move to take action based on the Norwegian
evidence, and dissolve the BIS. Primarily due to continued resistance
from the UK, the dissolution never actually occurred, and thus the BIS is
still extant today.
The most significant feature of the conference for the USA was the
creation of a system that placed the US Dollar, which was arguably the
strongest and most stable currency at the conference table, as the
world’s reserve currency and the development of the exchange rate
system as administered under the U.S. central bank, the Federal
For nearly thirty years, the economies of the western world were
tied to the value of the Dollar, which had been pegged to gold. The
Nixon shock ended all of that. It did not, however, end the hegemony
of the US Dollar. The pricing of oil in “Petro-Dollars” has continued
primarily out of international habit and because the U.S. has used its
residual clout to prevent any moves away from the practice of tying of
the price of oil to the now purely fiat US Dollar.
At the onset of World War II, the world’s currencies were already in
a mess but the British pound reigned supreme. By the end of WW II,
the world reserve currency baton had been handed off to the then
dominant US Dollar. After Bretton Woods, the US Dollar took its turn at
the top, but in 1944 the US Dollar was enshrined as the world’s reserve
currency based upon the United States’ status as the world’s largest
creditor, and that the Dollar was backed by reserves of gold.
Since abandoning the gold standard, it has been a forty year global
experiment involving the US Dollar and all the other debt-based
currencies that are, or were, tied to it as the world’s reserve currency.
Today The U.S. is the world’s largest debtor nation and the Dollar is
purely a fiat currency, meaning it is only valuable as declared by law, but
is not backed by anything but the “Full Faith and Credit of the United
The average life span of paper fiat currencies backed by nothing is
30 years, so the US Dollar has had a good run. As the world’s reserve
currency, the US Dollar could write its own ticket, but now the world is
looking for something more stable.
This has all happened before…only the last time it was the British
pound on the decline. This time it is the US Dollar. The difference is
that this time, the interdependent entanglements of all currencies is
more pervasive, so the potential for damage is much bigger and its
effect is likely to be more widespread.
In his 1993 book, Joel Kurtzman refers to the end of the gold
standard as The Death of Money. Kurtzman also warned of the
potential repercussions of an electronic banking system. His use of the
term The Death of Money also refers to the end of the understanding of
paper money as being representative of actual assets, like reserves of
gold or silver. Deposits largely exceed the amount of paper money they
are thought to represent to the point that many banks do not have large
sums of cash on hand. It is common for most banks to require the
maker of a cash withdrawal in excess of a given amount, often anything
over $5,000.00, to schedule for up to five days in advance to give the
bank time to get the cash.
Clearly ahead of his time, Kurtzman also warned of the dangers of
“securitization,” or the speculative risking of currency assets in complex
and risk-intensive mortgaged-backed securities, by pointing to the
potential for a wide-spread debt crisis.
These used to be separated by the now repealed The Banking Act of
1933, commonly referred to as the Glass-Steagall Act after the names of
its sponsors, which maintained a separation of commercial and
investment banking. The act was the birthplace of the Federal Deposit
Insurance Corporation (FDIC). Guaranteeing account deposits up to a
certain limit, the FDIC was meant to be a safety net for depositor’s
funds in case of bank failure. The Glass-Steagall Act was repealed by the
Gramm-Leach-Bliley Act in 1999, however, much of what it had
intended to prevent had already been deemed to be legal as interpreted
by the Federal Reserve.
Since the Federal Reserve Note (FNR)–the US Dollar denominated
currency issued by the Federal Reserve System–has been taken off of
the gold standard, there has been no limit on the amount of it that
could be put into circulation. Backing by gold had the effect of
controlling the amount of debt that could be created, as any dollars
issued into existence had to be redeemable. Since the debtextinguishing
effect of a value-backer for the Dollar has been removed,
the U.S. Treasury has “borrowed” more and more from the Federal
Following the Federal Reserve in the U.S., central banks worldwide
have participated in the creation of mushrooming mountains of debt.
We have entered a unique moment of history, where not just one
nation or alliance of nations is financially imperiled, but the economy of
every nation that is tied to the USD dominated western market is in
grave financial crisis. The currencies of all nations are falling in
comparison to commodities, as is evident in accelerating inflation
Since 1971, the issuance of debt-backed currency in circulation has
resulted in a parabolic rise in both national sovereign debt and money
supply. The “money” most people recognized is really only a
representation of a debt obligation that was created out of thin air
when the loan was made. The more debt that is created, the more
expanded the money supply becomes, the faster the existing currency is
devalued, and the higher the rate of inflation.
Having lost over 80 percent of its purchasing power since 1971, the
US Dollar is leading the race to the bottom as all other currencies join in
the competition to print their currencies into oblivion. In a global game
of financial brinksmanship, the central banks of the world, with the
Federal Reserve at the lead, are locked in a currency war of debasement
While the lending spree has brought the world to the incredible
state of global insolvency; for the central banks, which “loan” to their
governments, it has been the most lucrative period in the history of
man. The banks have been the direct beneficiaries of the present cycle
as they have raked in colossal amounts in interest payments secured by
the tax bases of their respective populations.
It has been good business for the banks, but now it has reached the
end of the road as the central banks of the world, led by the developing
nations have now embarked upon a quest to obtain and hold precious
metals as commodity money. The era of debt-based economy, which is
dependent upon the creation of debt, which is leveraged with still more
debt will draw to an end. The free-fall will come to a sudden stop and a
hard reset of the respective values of all commodities and currencies
will occur. The banks are already preparing for the paradigm shift.