Since the media has recently found interest in the prospect of the dollar being devalued, I thought this would be a good time to summarize the historical facts surrounding our fiat currency. A good way to kick off the discussion is to take a step back in time and listen to Nixon’s speech on August 15th, 1971 which put an official end to the gold standard and the Bretton Woods agreement from 1944.
The most amusing part of this speech is that he treats the international money speculators as terrorists waging a war on America and they must be defeated(Shock Doctrine?):
“Now who gains from these crises? Not the workingman; not the investor; not the real producers of wealth. The gainers are the International money speculators. Because they thrive on crises, they help to create them. In recent weeks, the speculators have been waging an all-out war on the American dollar.“
And his solution is simple, to stop the conversion of the dollar into gold, something that he said would only be temporary:
“I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets”
To ease the fears of the American people, Nixon stated that this was done just to stabilize the currency, not to devalue it:
“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. Now, this action will not win us any friends among the international money traders. But our primary concern is with the American workers, and with fair competition around the world.”
And now comes the post action analysis. What actually happened after Nixon temporarily suspended the conversion of dollars into gold. Well for starters, we all know that the action was not temporary. Secondly, it released the pressure that was building in the Bretton Woods system due to imbalances in international deficits. The US balance of payments turned negative in the 1950′s and through the 1960′s the gap between the official dollar peg on gold ($35) and the open market price on gold continued to widen. This put tremendous pressure on international governments to buy gold from the US at $35 and sell it on the open market. Nixon squashed this once and for all by halting the conversion, which gave the United States free reign to devalue their currency and run massive deficits.
Inflation is the hidden tax on the American citizen. Even though we currently face a stagnant or slightly deflationary environment, it is important to remember that inflation will come back and it will strike with a vengeance once all of Bernanke’s printed dollars hit the pavement and the economy reverts to some sort of positive growth. Congratulations to you for your participation in one of the largest wealth transfer heists ever orchestrated.