The ‘Fatal Error’ of 1971

It is going to be illuminating to see how the candidates for president pick up, if any do, on the fact that this week is the 40th anniversary of President Nixon’s closing of the gold window. That default, announced on August 15, 1971, signaled the end of the monetary system crafted by the soon-to-be victorious allies in World War II. The conference at which the system was originally agreed upon was held at the Mount Washington Hotel at Bretton Woods, New Hampshire. The centerpiece of the system was a gold exchange standard among governments that measured the dollar at a 35th of an ounce of gold.

Now, four decades after the collapse of Bretton Woods, recognition is spreading that the system of fiat money that emerged in the 1970s has not only been a failure but is at the root of our current travail and needs to be reformed. “Abandoning the gold standard was a fatal error we’re now all paying for,” is the headline over the latest dispatch to that effect. It appeared over the weekend in London’s leading broadsheet, the Telegraph. The piece was by its former economics editor, Edmund Conway, who is now at the school of government at Harvard that is named after President Kennedy.

Kennedy is a reminder that both liberals and conservatives in the American political tradition understood the logic of the role of gold in our international monetary system. He himself had vowed to maintain a dollar that was good as gold. It was Nixon, supposedly the more conservative of the two, who announced, after a secret meeting at Camp David, his plans for a new monetary system that, although he didn’t mention it at the time, would turn out to be fiat money with no constitutional basis and without backing of any kind.

In the short term, the closing of the gold window precipitated what Lewis Lehrman, writing in today’s Wall Street Journal, describes as “a decade of one of the worst inflations of American history and the most stagnant economy since the Great Depression.” The situation was righted by the combination of President Reagan’s supply-side fiscal policies and the tight money regime of Paul Volcker at the Federal Reserve. Yet there was no permanent repair of the world monetary system, no restoration of the legal checks of government over-reach.

The absence of any legal connection between the dollar and gold permitted the combination of fiscal and monetary over-reach that has, today, delivered us a dollar with a value of barely more than a 1,800th of an ounce of gold, less than a percent of the value of the constitutional dollar. It is noteworthy that the top contenders for the Republican nomination for president, Michele Bachmann, has said she’s prepared to look at a gold standard and that the close runner up, Ron Paul, has made sound money his central issue throughout his entire long career in the Congress.

Governor Pawlenty had also declared for sound money. So that the three top finishers in Iowa were either in or open to a campaign on sound money. Governor Pawlenty has since dropped out, prematurely in our view. Governor Perry is unclear to us on this head. Governor Romney has indicated he won’t challenge the Federal Reserve’s chairman, Ben Bernanke — a strategic error. It would be silly to make too much of an anniversary. But there’s no reason to let it slide entirely. The record these past 40 years is more than enough time to make it clear that fiat, electronic paper ticket money is a recipe for ruin, and with the value of a dollar having collapsed to historic lows, the moment strikes us as ideal to take the issue to the voters.