A Day of Infamy, 40 Years On

The Gold Window Slams Shut, August 15th, 1971

Mon, Aug 15, 2011 - 2:27pm

It was just another hot summer day in August, ten months before the blundering White House “plumbers” broke into the Watergate hotel and eventually cost Richard Nixon his presidency. However politically expedient and short-sighted Nixon’s goals in severing the dollar from gold backing on this date in 1971, this simple act opened the door to 40 years of excessive debt creation, deficit-spending and dollar debasement. Though little known or widely understood, this event has had repercussions which even overshadow the Watergate fiasco. August 15th, 1971 changed the fundamental stability and purchasing power of the “unit of account” known as the US dollar.

A 40 Year Ponzi Scheme

Generations of politicians have benefitted from a pure fiat currency. Once the link to gold was severed, all things became possible; expanded social programs, foreign wars and “incursions”, unlimited special pork projects for home districts. The incumbent politicians could create a bigger pie and get re-elected, always the bottom line. But this happy new world was all created with ever-greater amounts of newly created and borrowed money. There was no spending discipline that gold backing demands.

It was a slowly building Ponzi Scheme that no politician could possibly refuse. Borrow and spend money today, get re-elected tomorrow, and kick the “debt can” as far as possible down the road. It has worked beautifully for Washington, but all Ponzi Schemes ultimately collapse, and our 40-year fiat-currency joy ride appears to be on very unstable ground.

The Middle Class Blues

The 40-year run of pure fiat currency has been a huge problem for the middle class. Their paychecks have continued to lose purchasing power as the dollar has been continually debased. The days of “saving for a car” or buying on “layaway” have been relegated to the dustbin of history. Financing homes and cars have become the norm. The middle class lifestyle has become more and more difficult to maintain as their debt burdens increase and their purchasing power shrinks.

The middle class family of 1970 may not have been blessed with the technological advantages available to the middle class today, but it was blessed with much less debt and much more purchasing power. The same is true for retired senior citizens in 1970. The ultimate price of 40 years of fiat-currency driven inflation has been devastating to the hopes and dreams of millions in the middle class, leaving them with little hope on the horizon.

“We have at this particular stage a fiat money which is essentially money printed by a government and it’s usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity…there are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.” Former Federal Reserve Chairman Alan Greenspan (January 2011) emphasis added

With a gold-backed dollar, the Federal Reserve would have been constrained from flooding the globe with excessive liquidity. Politicians will always seek self-preservation by the spending and channeling of money. The only way to control the money supply is to take the power out of politics with a self-correcting system. If we had retained a gold-backed dollar (for international exchange) perhaps our growth may have been slower since 1971, but it would have been more sustainable. People could have planned their lives with more certainty than today. The growing mountain of overhanging debt is our national “Sword of Damocles”. And sadly, the sword could fall at any time.

Glazed Eyes Under a Cascade of Debt

The public has become bored, or perhaps just numb to all the debt and deficit talk. But the numbers are so big that most of us can’t comprehend the levels of debt piling up. The eyes glaze over in discussions of millions, billions and trillions of dollars in borrowed money. At some point the public prefers the solace of NFL football or Jersey Shore to the cascade of debt numbers.

Our current federal debt is over 14 trillion dollars. In 1981 it was approximately one trillion (even after the Civil War, two World Wars, the Depression and Vietnam). From 2001 to 2011, our federal debt has soared 8 trillion dollars alone. This discussion doesn’t even include the off-balance-sheet wars in Afghanistan and Iraq, or the trillions upon trillions of unfunded mandates for Social Security and especially Medicare coming down the road.

This illustration may give some of you a little better perspective of what a trillion dollars looks like in relation to a million dollars. A stack of $100 bills approximately four feet high would equal one million dollars. To reach one trillion dollars, the stack would reach 800 miles into the darkness of space. A stack of $100 dollar bills reaching straight up beyond the limits of human sight and likely human imagination.

By the way, our government is on track to add nearly two trillion to the debt pile next year alone. One thousand six hundred miles of $100 bills borrowed in just one year. Not only is it unsustainable as so many have noted, but it can never be paid back given historical levels of growth in this country. The only realistic solution the government sees is further debasement of the currency; a cowardly method of default.

Protect Your Purchasing Power

It is vital at this point in history to educate yourself and do whatever you can to protect your purchasing power against an ever-weakening dollar. If we are lucky, perhaps enough people will force change in Washington before the fiat currency “experiment” blows up.

The link between freedom and the events of August 15th, 1971 is little understood and clearly under the radar for most Americans. If we as a nation are to avoid irreparable damage to our way of life and freedoms, then dramatic change must occur. Debt can be overcome over time, but not if we keep adding new debt at exponential rates. Reversing the events of 40 years ago and re-instituting a gold-backed currency is not a panacea, but merely a critical first step. The fear is that step won’t even be considered until the dollar crisis is upon us.

“Gold is money, everything else is credit” J.P. Morgan 1912, before Congress

About the Author

Financial Consultant
tallison [at] puplava [dot] com ()