The Great Keynesian Coup of August 1971: Fifty Years Later
On August 15, 1971, the last remains of what had been a magnificent monetary system died a terrible death, and the American academic, political, business, and media elites led the cheers. The Dow Jones Average jumped by more than 32 points the next day. A de facto national default was spun as a great liberation from a tyrannical financial arrangement that had plagued humanity for generations. A half century later the disinformation continues, as intellectual bankruptcy parallels the financial bankruptcy of that event.
I write, of course, of the decision by President Richard Nixon to officially close the “gold window,” through which the US government was obligated to sell its gold stores to foreign governments at $35 an ounce, which even then was a bargain. As Nixon’s regime encouraged the Federal Reserve System to inflate the dollar to pay for its bloated military and welfare spending, as had the Johnson and Kennedy regimes before him, it became apparent that the US dollar was quickly losing value. The United States was in rapid decline—and the dollar was falling with the nation’s prestige.
What happened? There are several accounts, and I will give the main ones, ending with the Austrian perspective. The first will be the Keynesian, the second the monetarist (Chicago school), the third the supply-side version, and the fourth from the Austrians. Before doing that, however, I will give a brief account of the events that began with the Bretton Woods Conference in 1944 and ended in national disgrace, an ignominy that even now the official American narrative refuses to recognize.
The Bretton Woods Conference didn’t occur in a vacuum. Just a month before, Allied troops had secured a beachhead in France and had begun to slowly push the German army eastward. Across the European continent, armies from the Soviet Union were slowly destroying the Axis forces from the other direction. In the Pacific, US bombers were beginning to lay waste to Japanese cities, and the Japanese armies were suffering defeat after defeat. Final victory for the USA and its allies would not come for another thirteen months, but even in July 1944, it was clear how the war would end.
The US State Department explains the stated purpose of the conference: to help reestablish trading relations in the postwar world:
The lessons taken by U.S. policymakers from the interwar period informed the institutions created at the conference. Officials such as President Franklin D. Roosevelt and Secretary of State Cordell Hull were adherents of the Wilsonian belief that free trade not only promoted international prosperity, but also international peace. The experience of the 1930s certainly suggested as much. The policies adopted by governments to combat the Great Depression—high tariff barriers, competitive currency devaluations, discriminatory trading blocs—had contributed to creating an unstable international environment without improving the economic situation. This experience led international leaders to conclude that economic cooperation was the only way to achieve both peace and prosperity, at home and abroad.
Some cynicism can be excused if one sees a disconnect between the high-minded rhetoric of the document and the actual policies of the Wilson and Roosevelt administrations that played a major role in creating the calamities from 1917 to the end of World War II. But then, it is a rare occurrence when government bombast and the truth intersect. Not surprisingly, Bretton Woods was an attempt by governments to deal with the previous disastrous results of intervention by imposing even more intervention.
In his classic What Has Government Done to Our Money, Murray N. Rothbard (who will figure heavily in my interpretation of the August 15 events) describes the Bretton Woods Agreement:
While the Bretton Woods system worked far better than the disaster of the 1930s, it worked only as another inflationary recrudescence of the gold-exchange standard of the 1920s and—like the 1920s—the system lived only on borrowed time.
The new system was essentially the gold-exchange standard of the 1920s but with the dollar rudely displacing the British pound as one of the “key currencies.” Now the dollar, valued at 1/35 of a gold ounce, was to be the only key currency. The other difference from the 1920s was that the dollar was no longer redeemable in gold to American citizens; instead, the 1930’s system was continued, with the dollar redeemable in gold only to foreign governments and their Central Banks. No private individuals, only governments, were to be allowed the privilege of redeeming dollars in the world gold currency. In the Bretton Woods system, the United States pyramided dollars (in paper money and in bank deposits) on top of gold, in which dollars could be redeemed by foreign governments; while all other governments held dollars as their basic reserve and pyramided their currency on top of dollars. (p. 99)
To put it another way, the Bretton Woods Agreement really was a scheme to give the appearance of “sound money” all the while ensuring that the sound money regime that existed prior to the outbreak of World War I would not be reinstituted. Furthermore, Henry Hazlitt, who then was writing editorials for the New York Times (how the mighty have fallen!), saw through everything and predicted that the new monetary arrangements would lead to disastrous consequences. He wrote:
The greatest single contribution the United States could make to world currency stability after the war is to announce its determination to stabilize its own currency. It will incidentally help us, of course, if other nations as well return to the gold standard. They will do it, however, only to the extent that they recognize that they are doing it not primarily as a favor to us but to themselves.
But Hazlitt knew that governments in 1944 were institutionally incapable of returning to sound money and that the elites in government, academe, and the media were hostile to anything but fiat money. Ultimately, Hazlitt and the NYT would part ways over his disa
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