Anniversary of Nixon's 1971 Panic -- It Hobbled America

Exactly 40 years ago, on August 15, 1971, President Nixon responded to a spike in gold prices and a horrifying 4 ½% inflation rate by ending the link between the dollar and gold (the 1944 "Bretton Woods" agreement) and imposing wage price controls, a system which would last several years in America.

An opinion piece in the curent Forbes magazine by Charles Kadlec reviews the long term effects of Nixon’s decision.  Kadlec is not a fan of the Nixon approach.  He says it doomed Nixon’s presidency, broke a solemn pledge to maintain a steady dollar, and presented the United States with the worst 40 years of economic growth in its history. The promises made were vast – American economic growth would be unshackled from the price of gold; the Federal Reserve would be free to use monetary policy to benefit the American people; costly recessions would be avoided; unemployment would stay low; devaluing the dollar would decease the trade deficit; and price stability would be maintained, since imports were only 10% of the American economy.

                     "Each and every one of these promises has been broken.



"Since Nixon killed the gold standard, the unemployment rate has averaged over 6% and we have suffered the three worst recessions since the end of World War II. The unemployment rate averaged 8.5% in 1975, almost 10% in 1982, and has been above 8.8% for more than two years, with little evidence of any improvement ahead.

"This performance is horrendous compared to the post World War II gold standard era, which lasted from 1947 to 1970. During those 21 years of economic ups and downs, unemployment averaged less than 5% and never rose above 7%.
"Growth, too, has slowed. Since able men and women were given the power to manipulate the quantity and value of the dollar, real economic growth has averaged 2.9% a year – more than a full percentage point slower than the 4% growth rate during the post World War II gold standard era."                               --Kadlec’s opinion piece in Forbes

Kadlec admits that 1% slower growth doesn’t look like much; but over 40 years it means our economy could have been $8 trillion a year bigger than it is now. That would make family income at $70,000 a year instead of just under $50,000 a year, Kadlec reckons. The tax base for government at all levels would be50% larger. Instead of the 1971 trade surplus, our trade deficit was $405 billion for the last year. When gold was tied to the dollar, inflation ran at less than 2% a year.

"Moreover, if Nixon and his successors had maintained the promise that a dollar was worth 1/35th of an ounce of gold, a barrel of oil today would sell for less than $2.50," Kadlec writes.

He adds, "That's right, the whole notion of an energy crisis and the ever more intrusive government regulations dictating energy usage are based on the grand illusion that the price of oil has gone up more than 30 fold, when in fact, it is the dollar whose value has fallen relative to gold, oil, and all other goods and services over the past 40 years."

Kadlec notes that since abandoning Bretton Woods, the USA has seen 12 financial crises. He recommends returning to a gold standard for American prosperity in the 21^st century.  Unfortunately, Kadlec does not discuss the disasterous and invasive years of Nixon's wage price controls in the early 1970s (Phase I, Phase II, Phase III and Phase IV).  The wage-price scheme was announced in the same August 15, 1971, Nixon speech.

Summarized from: http://news.yahoo.com/nixons-colossal-monetary-error-verdict-40-years-later-140035743.html