On August 15th 1971, 49 years ago today, Richard Nixon, the only president of the US to ever resign, announced to the public:
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 interests 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. The effect of this action, in other words, will be to stabilize the dollar.
Secretary Connally later filed for personal bankruptcy.
And I think it’s obvious today that dollars are not worth “as much” as they were then.
The goal of www.wtfhappenedin1971.com when it launched almost a year ago has been to present some data from various sources covering the last 49 years since this pivotal event. The effects of the decoupling of the dollar from gold, known as the “Nixon Shock”, are mused upon by many economists, for example, in 1996 Krugman wrote:
Above all, the Fed is free to respond to actual or threatened recessions by pumping in money. To take only one example, that flexibility is the reason the stock market crash of 1987—which started out every bit as frightening as that of 1929—did not cause a slump in the real economy…Furthermore, a system that leaves monetary managers free to do good also leaves them free to be irresponsible…
However, it’s likely that the Nixon Shock had far greater implications than is generally covered by “many economists”. The effects of inflation are insidious, often unseen, and the ability to effortlessly create the most important commodity on the planet – money – should not be considered lightly.
I like to ask questions, so here are some we might consider asking ourselves some 49 years later:
- “Does printing money prevent or ameliorate recessions?”
- “Should we ‘prevent’ recessions?”
- “Why do businesses fail? Should they?”
- “Is corporate, personal, and governmental debt at all-time-high due to inflation?”
- “What about savings? Why don’t we have much of that anymore?”
- “What are the effects of inflation vs deflation? Which groups win/lose?”
- “What’s the difference between rapid deflation and mild, natural deflation?”
- “What are the hidden or non-obvious effects of printing money?”
- “Does the ‘flexibility’ of being able to print money cause a moral hazard?”
- “If I had the ability to create infinite money, would I rationalize reasons to do so? Would I be benevolent with that power?
- “Do asset-owners do better when money is printed?”
- “Who owns the most assets?”
- “Are we better off today then we would be with a money that’s difficult to create?”
- “Did the trillions printed in 2008 ‘save’ us from the recession?
Keep asking questions. Keep looking for answers. WTF Happened in 1971?
-Ben
Book of the Month:
The Price of Tomorrow: Why Deflation is the Key to an Abundant Future
-“The world order, largely intact since the end of the World War II, seems to be breaking down. Capitalism, and its relentless march towards progress, allowed many to win. Although no system is perfect, the rules by which capitalism operated were well regarded and understood. You could expect that if you made a big bet and were wrong, you would be wiped out—but if you were right, your hard work, ingenuity, or risk taking would be rewarded. In game theory, we could call this a dominant cooperative strategy, and it dominated for the better part of the twentieth century. The rise of fiat currencies that could be manipulated domestically and the bailout in 2008 changed that strategy to one where the players whose bad bets caused the crisis, instead of being wiped out, were rewarded handsomely. Capitalism’s long-dominant cooperative strategy was replaced by a non-dominant strategy, crony capitalism, where the cheaters won.”
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