The 40th anniversary of an event that changed the gold market forever is drawing near. Posted by James Randolph on May 13, 2011
The birth of the modern gold market.
May 13, 2011 – The 40th anniversary of an event that changed the gold market forever is drawing near. It was in August of 1971 that President Richard Nixon pulled the pin and tossed a grenade into a world monetary system. The story behind the so-called Nixon Shock has an eerily familiar ring.
In 1944 representatives from the Allied nations convened the United Nations Monetary and Financial Conference in Bretton Woods, NH to devise a global monetary management system to facilitate reconstruction following WWII. From that conference came the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now part of the World Bank. The US, being the world’s largest creditor by a wide margin, used its clout to cut a pretty sweet deal.
Not only did we secure special veto powers over decision making by both the IMF and IBRD, we saw to it that foreign exchange reserves must be held in US dollars and all exchange rates be tied to the dollar. Suddenly we were free to run up debt like there was no tomorrow.
Still, it all seemed reasonable enough – the dollar was fixed to gold and was convertible on demand – and the conference put its stamp of approval on the new global reserve currency. For the next quarter century it actually worked out fine, but the kid was loose in the candy store.
For the first time that century the US began running up both balance-of-payments and trade deficits. The rest of the world watched nervously as gold coverage of the dollar plunged from 55% down to 22% by 1970. Doubt was setting in about whether our government was capable of balancing the budget or trade.
Then we started up the printing presses in earnest in 1971, shipping some $22 billion in excess liquidity overseas in just the first six months. Worried about inflationary pressures from the flood of cheap dollars, Germany was first to pull out of Bretton Woods. Switzerland followed suit just a few months later when Congress recommended devaluing the dollar. By midsummer European nations were clamoring to convert their greenbacks to gold.
Thus, on August 15th, the President slammed the door to Fort Knox in the face of all our friends and allies. Instantly gold was out of the global monetary system, leaving it pinned to a single fiat currency. Within five years all of the major currencies had followed suit, and the rest, as they say, is history.
In a jet-propelled world our economy keeps bouncing along in a 40-year-old Fiat. Fortunately Nixon also did us a favor. By removing the ban on gold investments he gave individual investors the means to keep moving forward as the old clunker wheezes to a halt.
Senior Staff Writer – Certified Gold Exchange