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Another legacy Among his many misdeeds, 30 years ago Richard Nixon took us off the gold standard August 12, 2001 By John Seiler The Orange County Register Pearl Harbor, Dec. 7, 1941: My parents and their generation remember exactly where they were when they heard about it. President Kennedy's assassination, Nov. 22, 1963: My baby boom generation remembers exactly where it was that day. (I was in third grade and a teacher, Mrs. Churchill, rushed into our room screaming, "He's been shot! He's been shot!) Nixon's wage and price controls and the end of the gold standard on Aug. 15, 1971: Call me obsessed with politics, but I also remember exactly where I was that day. I was vacationing with my family at a cottage in Michigan and heard it on the radio. I had been reading National Review and some economics and said something to my family like, "This is awful. It will be really bad for America." Thirty years later that was an underestimation. Though three decades in the past, Nixon's actions that day remain hardly known even though, combined, they were the worst economics decisions politicians have made since the Great Depression. This isn't a dull economics story, I hope. It affects you and me every day, especially as a recession looms. That summer of 1971 I turned 16 and began driving. I remember I paid 28 cents for gas. Two months ago I was paying $2.10, then a couple of days ago I paid $1.55. In the late 1960s, some friends of mine in Huntington Beach paid $19,000 for their home. Recently in their neighborhood, houses similar to theirs have been selling for $300,000. Why is this happening? Why the inflation and price fluctuations? Because of those really bad decisions made in 1971 by Orange County's most famous son, Richard Milhous Nixon. Nixon acts Nixon certainly had a checkered political career, but no one ever charged him with timidity. When it came to the economy, he took bold steps to deal with the economic problems of 1971. Too bad most of the steps were the wrong ones. "The time has come for decisive action - action that will break the vicious circle of spiraling wages and costs," Nixon announced on Aug. 15, 1971 in his typically dramatic fashion. "I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days." He threatened that the controls "will be backed by government sanctions, if necessary." Most of Nixon's wage and price controls didn't last just 90 days, but until 1974. The price controls on petroleum lasted until President Reagan ended them in 1981. Ending the gold standard in 1971 also meant the country was off the gold standard for the first time since the Civil War; and although the gold standard was restored after that war, America has not gone back on the gold standard since 1971. War and welfare Nixon's action came after strong inflationary pressures built up during the 1960s when President Johnson simultaneously began his Great Society welfare programs and fought the Vietnam War. Both big programs began the long run of deficit spending that only ended in the late 1990s - almost 30 years of red ink. A 10 percent income tax surcharge in 1968 made things worse. Although Nixon did wind down the costly war, instead of also cutting Great Society programs, he expanded them and increased taxes again. Nixon and Lenin Nixon called his 1971 program a "New Economic Plan," the same name Lenin used for his scheme in the Soviet Union of the 1920s. What a bad sign. "This was pure political expediency and it worked - at least in the short term," wrote biographer Jonathan Aitken in "Nixon: A Life." "Inflation temporarily halved and there were satisfactory falls in unemployment and labor costs." In the 1972 election, Nixon won with a landslide, grabbing every state's electoral votes except those of Massachusetts. But inflation is like cocaine: It grants a temporary euphoria followed by depression and the need for another fix. The wage and price controls couldn't long control inflation because people are creative in how they get around government restrictions. Companies granted fringe benefits increases or promoted people into higher positions; product lines were replaced with "new" lines almost identical to the old. And foreign products were not restricted. The reckoning came pretty fast, in the severe slump of 1973-75. In "RN," his memoirs published in 1978, even Nixon admitted that "in the long run I believe that it was wrong. The piper must always be paid." But he still believed that ending the gold standard "turned out to be the best thing that came out of the whole economic program." Nixon was wrong again, writing those words just before the worst inflation in America's history occurred in 1979-80. Why so much inflation beginning in 1971 when the gold standard ended? "At the same time, he was planning to vastly expand the money supply under Arthur Burns, the Federal Reserve Board Chairman," Lew Rockwell told me; he's president of the free-market oriented Mises Institute. The printing presses were cranked up and money flooded into the system, with no gold standard to anchor the dollar and the wage and price controls in place to limit inflation. Stagflation and malaise Even as unemployment more than doubled to 9 percent in May 1975 from 3.9 percent in January 1970, inflation was rising close to double-digit rates every year. This combination of stagnation and inflation was dubbed "stagflation." Under Jimmy Carter it became a "malaise." Hardest hit were middle class workers, who suffered from "bracket creep." In those days, the top income tax rate was 70 percent, compared to 38.9 percent today. "[A] decade of bracket creep diminished the purchasing power of a person with a salary in the $30,000-$50,000 range, whose wage increases simply kept pace with inflation, by about 20 percent," wrote The Tax Foundation, a taxpayer-oriented think tank, in a recent study. The big spenders in the government loved it because "for every 10 percent of inflation, federal revenues increased by 17 percent." In another calculation, the Foundation found that from 1971 to 1981, the "malaise decade," federal spending as a percentage of personal income rose by a shocking 17 percent. Despite the recent prosperity, government has been first in line to take more and more of our money. From 1971 to 2001, federal spending as a percentage of personal income increased 28 percent. Tax revolt: Prop. 13 In California, the famous battle over Proposition 13 in 1978 stemmed to a great extent from inflation. As inflation pushed up property values, the government kept assessing higher and higher taxes. This especially hurt retirees and others on fixed incomes, forcing many to sell the homes they had lived in for decades. Prop. 13 capped property taxes at 1 percent of value and sparked a national - even worldwide - tax revolt. The gold factor The end of that gold standard was one of the worst and most permanent causes of the inflation of the 1970s. Gold's price had been pegged at $35 an ounce since 1934. And before that, throughout the 19th century to 1934 (excepting only the Civil War), gold was valued at $20.67 an ounce. That meant almost two centuries of price stability as America grew from 13 sparsely populated colonies into the world's dominant economic power. After Nixon severed the dollar's tie to gold in 1971, gold zoomed to $850 in 1980. No wonder inflation was so high! After Ronald Reagan was elected in 1980, gold dropped to about $350 an ounce and hovered around that price through most of the '80s and early '90s, but in the last four years has dropped to $270. Gold and trade Stable money promotes free trade and prosperity. From 1950 to 1970, the world enjoyed a long economic boom as every day of every year the dollar was worth exactly 4.37 Swiss francs, 0.89 Australian dollars and 625 Italian lira; and either 361 or 360 Japanese yen and between 4.0 and 4.2 West German marks. Since America went off gold in 1971, the world has suffered daily currency fluctuations. When I was in the U.S. Army in West Germany in the late 1970s, the dollar was worth so little, about 1.6 marks, that GIs with families had to go on food stamps to survive. Today, the dollar is so strong Yank tourists are flocking to Europe. Who knows what tomorrow will bring? As Nobel economics laureate Robert Mundell noted, the years since 1971 have been the first time in world history that no major country was on the gold standard, meaning that there is no fixed value for anything. Gold and oil Gold's importance can be seen by a simple comparison from "The Economy in Mind," by the late economist Warren Brookes. Our recent energy crisis in California has brought back, for many, memories of the energy crisis of the 1970s, when gas seemed to be in short supply and prices soared. The Arab oil boycott of 1973 and the Iranian crisis of the late 1970s were blamed. But Brooks noted, "In 1970 an ounce of gold ($35) would buy 15 barrels of OPEC oil (2.30/bbl). In May 1981 an ounce of gold ($480) still bought 15 barrels of Saudi oil ($32/bbl)." As I write this in 2001, an ounce of gold ($276.5) buys 9.9 barrels of oil ($28/bbl). That's still pretty close to the historic ratio and an indication that oil, which has been declining in price lately, may be headed down toward $18/bbl, about the average price it held the past five years. The point is that gold is a much stronger indicator of price stability than many people realize. Severing the link to gold "increased a fundamental instability in the economy," Rockwell said. "We're all a lot poorer." Without gold, we cannot know for certain what the prices of anything will be in the coming years. International trade is retarded because companies, in addition to figuring import and export prices, also have to become currency speculators. Global meltdown? Argentina "is teetering on the edge of default on its $128 billion debt, threatening a global financial crisis that could shake neighboring Brazil and other such emerging markets as Russia and Turkey," reported The Washington Post Monday. Early in the 1990s, Argentina ended hyperinflation by linking its currency to the dollar, privatized much industry and enjoyed prosperity. But the dollar's recent fluctuations have plunged the country - and maybe the world - into chaos. An analogy for O'Neill Economist Jude Wanniski of Polyconomics recently met with Treasury Secretary Paul O'Neill to make a pitch for gold. Wanniski wrote of an analogy he explained to O'Neill, "If our contract is such that I deliver him a loaf of bread every day, with the contract requiring him to deliver the wine all at once at the end of a year, the government must keep the dollar constant against gold in that period, for if it deflates, O'Neill, who is in my debt, will be required to give me much more wine than he anticipated at the outset." However, "If the dollar inflates, as his creditor, I will be forced to steadily increase the amount of bread I give him, and at the end of the year will have to be satisfied with much less wine. In a world where the unit of account is floating against the real world of commodities, gold being the most sensitive proxy to monetary error, inflations and deflations will be the rule, not the exception." Nixon's price control errors mostly have been corrected and the lessons learned, which is why the Bush administration has been resisting pressure from Gov. Gray Davis to impose electricity price controls (except of a limited kind). Bring back gold But we still need to reverse Nixon's other mammoth economic mistake by restoring the gold standard. Calls to do so have come recently not only from Rockwell and other gold enthusiasts at the Mises Institute and Wanniski, but former congressman and vice presidential candidate Jack Kemp and columnist Bob Novak. President Bush, Treasury Secretary O'Neill, Fed Chairman Alan Greenspan and Congress all should work toward again anchoring the dollar to gold. If America did so, the rest of the world would follow. As America's economy continues its slowdown, bringing back gold would stabilize the economy and especially make international trade easier. Currency certainty would replace uncertainty. Thirty years of Nixon's mistake are enough. |
