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The Nixon Shock And The Closing Of The Gold Window

Richard Nixon, the 37th President of the USA.

Nixon had the rather unsavoury task of announcing to the world that the US Dollar would no longer be backed by Gold. With immediate effect. Thus ended the Bretton-Woods Economic Era which had started in 1944. 27 years of existence.

Obviously, the US DOLLAR did not disappear from one day to the next.

It was simply re-invented under the new name of ………… the US DOLLAR.

Life continued. The US economy remained number 1.

Exit Gold Standard. Enter FIAT.

Today, August 15, 2021, is the 50th Anniversary that marks the end of the Bretton-Woods Agreement.

Some say that, had it not been Nixon announcing the news, it would simply have been another US president.

You can catch an extract from his TV announcement made August 15, 1971, in this video:

President Nixon Addresses The Nation On A New Economic Policy


The Bretton-Woods Conference


The Bretton-Woods Conference took place in July 1944 in New Hampshire, USA, even as the war was still raging. It established the new rules for a Post-WWII era in terms of Financial, Monetary and Economic Policy.

Attendees laid the foundations for International Monetary Fund (IMF) and the International Bank Of Reconstruction And Development (IBRD).

Rules for Foreign Exchange Currency Convertibility were also defined.

The Masterminds and Têtes Pensantes of the economic and political class had every intention of avoiding a repeat of past mistakes. Especially, the “Race To The Bottom”, as nations devalued their currencies to stay competitive, between the two world wars.

A major theme at the conference was to foster more international economic cooperation between nations and avoid the “Every Man For Himself” attitude of the past.

The World was literally being bled dry by the war. Attendees knew that very soon, the world economic activity would have to be kick-started on a massive scale.

Huge Infrastructure Programs would need to be introduced and literally 10s of millions of people would have to be displaced.

Creation of jobs on a scale never seen before would be crucial for stability.


44 Nations


44 nations attended the United Nations Monetary And Financial Conference aka The Bretton-Woods Conference. Those present still had in the back of their minds, the extreme pain of hyper-inflation experienced in the Weimar Republic in 1923.

They had all witnessed the 1929 debacle that had affected the whole world.

Each nation had its team of negotiators, including some of the Top Economic Brass of the world:

  • John Maynard KEYNES (UK)
  • Henry MOREGENTHAU Jr (USA) who played a central role in the creation of President Franklin D. Roosevelt’s NEW DEAL
  • Harry Dexter WHITE (USA) – Chief International Economist of the US Treasury
  • Pierre Mendès FRANCE (France) who went on to become Prime Minister (1954-1955) under the Presidency of René Coty.

The Gold Standard

One aim of the Agreement was to peg the US Dollar to Gold.

The US Government made the commitment to maintain a store of physical Gold in the US Government Reserves equal to the amount of US Dollars in circulation in the world.

The value of Gold at the time was fixed at $35/Oz.

Any increase in the amount of US Dollars would require the US Government to acquire and store the equivalent amount in physical Gold.

This in effect was supposed to create economic stability and confidence in the US Dollar throughout the world

Other currencies were then pegged to the US Dollar at a pre-agreed Exchange Rate, thus creating more stability.

The US Dollar became the International Reserve Currency of the post-WW2 years.


The Death Knell leading to The Nixon Shock


Nixon’s announcement confirmed what many countries had suspected or had already known for a number of years:

The amount of Physical Gold held in US Government vaults no longer corresponded to the amount of US Dollars in circulation. The Vietnam War had contributed to this increase in undeclared circulation.

A witness to this imbalance was when Valéry Giscard d’Estaing (still known to the French to this day, as VGE) who coined the phrase “EXORBITANT PRIVILEGE” in the 1960s.

At the time, as French Minister of Finance under Charles De Gaulle, VGE considered that the unfair advantage bestowed upon the US Dollar was resulting in other countries indirectly financing the American Dream.

In 1965, De Gaulle sent a French Destroyer to New York harbour to exchange French Government US Dollar reserves for physical Gold.

France was only one of several countries to make such an exchange.

Bank Run

And so began the “Bank Run” on US Govt physical Gold reserves, with other nations expressing their lack of confidence in the system in a similar way.

It was soon to create a significant depletion in the US Government Gold Reserves.

This led to the “Nixon Shock”.

With Nixon’s announcement on the 15th of August, 1971, the Bretton-Woods Agreement was ended in one fell swoop. Thus ended the convertibility of the US Dollar to Gold. The Closing Of The Gold Window.


50 Years Since The Nixon Shock


For the last 50 years, the US Dollar has not been backed by physical Gold. In fact, as a FIAT currency, it is not backed by any commodity. The Pound Sterling and the Euro are also FIAT currencies as are most currencies today. The Central Bank of a sovereign nation with a FIAT currency has greater control of that nation’s economy and can issue (print) currency when it deems fit.

It’s interesting to note that within a relatively short period of time, the spot price of Gold went from $35/Oz in 1971 to $850/Oz in 1980 on the free market.

You might say that Gold reverted to its true value of the time after many years of price suppression.

The Yom Kippur War in 1973 between Israel and a coalition of Arab States led by Egypt & Syria created an Oil Shock.

The Global World Economy took a massive hit, as shipping supply lines became disrupted and spikes in oil prices became a reality.

The 1970s was a period of significant inflation when the US economy greatly suffered. As did the rest of the world. Interest rates in the US rose to almost 20%.

The PETRO-DOLLAR

In order to bring about economic stability, the PETRO-DOLLAR system was devised to avoid excessive volatility in the price of oil. In the mid-1970s, It was agreed upon by many countries that the price of oil was to be denominated in (new) US Dollars and that Oil/Petrol-related transactions were to be made in US Dollars.

The US Dollar retained its position as leading currency throughout the world.

The only thing useful banks have invented in 20 years are ATMs

Paul Volcker, Head of the US Federal Reserve1979-1987

In the last 50 years, we have witnessed events that have truly transformed society on a global scale.

1970s

  • 1970: Arthur F.Burns is nominated as head of the US Federal Reserve
  • 1971: August 15: The Nixon Shock. The US Dollar is no longer linked to the price of Gold
  • Heavy inflation in the 1970s
  • 1972: Richard Nixon is re-elected and becomes the first US President to visit China
  • 1973: SWIFT was created (Society for Worldwide Interbank Financial Telecommunication)
  • 1973: The Yom Kippur War
  • The ensuing Oil Shock
  • 1974: Nixon becomes the first US President to resign
  • 1974: Gerald Ford becomes the 38th President of the USA
  • 1975: The end of the Vietnam War with the Fall of Saigon
  • 1975-1990: The Lebanese Civil War
  • 1975-1979: Mass genocide in Cambodia by Pol Pot & the Khmer Rouge Regime
  • 1976: The first commercial Concorde Flight from London to Paris
  • 1976: 4th of July, the Bicentennial anniversary of the Declaration Of Independence
  • 1976: Jimmy Carter becomes the 39th US President
  • 1978: G.William Miller succeeds Arthur F.Burns as head of the US Federal Reserve
  • 1978 China opens up its economy
  • 1977: Steve Jobs and Steve Wozniak create Apple Computers
  • 1977: Elvis Presley dies at the age of 42
  • 1978: Louise Brown becomes the first test-tube baby
  • 1978: Egyptian President Anwar Sadat and Israeli Prime Minister Menachem Begin bury the hatchet during the Camp David talks led by President Jimmy Carter
  • 1979: Paul Volcker becomes head of the Federal Reserve and helps to put an end to the 1970s stagflation
  • 1979: Three-Mile Island nuclear incident
  • 1979: Margaret Thatcher becomes the first female Prime Minister of the UK
  • 1979: The Iranian Revolution begins
  • 1979: The invasion of Afghanistan by the USSR

1980s

  • The 1980s was the start of the computer age with an increase in productivity
  • 1981: Columbia is the first Space Shuttle to be launched
  • 1981: Ronald Reagan becomes the 40th US President
  • 1982-1988: The Iran-Iraq War
  • 1982: Leonard Brezhnev dies after leading the Soviet Union since 1964
  • 1982: Yuri Andropov succeeds Brezhnev as leader of Soviet Union
  • 1983: ARPANet is born and is to become the precursor to the internet
  • 1984: Konstantin Chernenko succeeds Andropov as leader of Soviet Union
  • 1985: Mikhail Gorbachev becomes leader of the Soviet Union
  • 1986: The Tchernobyl Nuclear disaster
  • 1987: Alan Greenspan succeeds Paul Volcker as head of the US Federal Reserve
  • 1987: Black Monday the 19th of October Stock Market Crash
  • 1998-1991 The dissolution of the Soviet Empire & the Warsaw Pact
  • 1989: The dismantling of the Berlin Wall
  • 1989: George H.U.W. Bush becomes the 41st US President

1990s

  • 1990s Cell phones although cumbersome, become more and more used
  • 1990 German Reunification
  • 1990-now Start of the New Globalisation
  • 1990-1991 The Gulf War following the Iraqi invasion of Kuweit
  • 1991-2001 Different Balkan wars
  • 1992 KYOTO Protocol: a first worldwide approach to tackling Climate Change
  • 1992-2000 Clinton-Gore Administration. Clinton, 42nd US President, promises the development of the Internet. Al Gore coins the phrase “Information Highway
  • 1994: The Rwandan Genocide
  • 1997: Tony Blair becomes Prime Minister of the UK
  • 1998: The Belfast Agreement aka The Good Friday Agreement is signed by the UK and Irish Politicians
  • Widespread deployment of mobile networks
  • 1999-2002: Gordon Brown, Chancellor Of The Exchequer sells 401 tonnes of UK Gold reserves at an average price of $275/Oz
  • 1999: Anti-globalisation Demonstrations begin

2000s

  • 2000: Vladimir Putin becomes leader of Russia
  • 2001: George W.Bush is inaugurated as the 43rd US President
  • 2001: 9/11 Twin Towers Terrorist attack
  • 2001: China integrates the World Trade Organisation
  • 2000-2002: The bursting of the DotCom Bubble
  • 2001: NATO Troops enter Afghanistan
  • 2003: US-led coalition goes to war in Iraq
  • 2004: the integration into the EU of most of the former Eastern-bloc countries
  • 2005: The Kyoto Protocol environmental treaty takes effect
  • 2005: Birdflu (H5N1) outbreak in Asia
  • 2005: Worldcom Fraud comes to light
  • 2005: French voters reject the European Constitution, as do the Irish and Dutch voters
  • 2005: Hurricane Louisiana hits Louisiana
  • 2006: Google purchases YouTube for $1.65 Bn
  • 2006: China blocks access to Wikipedia to its citizens
  • 2006: Ben Bernanke succeeds Alan Greenspan as Chairman of the US Federal Reserve
  • 2007: Gordon Brown becomes Prime Minister of the UK
  • 2007: The first Airbus A380 with Singapore Airlines from Singapore to Sydney
  • 2008-2009: The Great Financial Crisis (GFC) aka The Subprimes
  • 2008: The Lehman Brothers go bankrupt following the subprime mortgage crisis
  • 2009: Barack Obama is inaugurated as the 44th US President
  • 2009: 3rd of January Bitcoin Network comes into existence: The Genesis Block is mined by Satoshi Nakamoto

2010s

  • 2010 the Chinese economy overtook Japan to become the second largest in the world
  • 2011: The Fukushima Nuclear Disaster
  • 2012: Xi Jinping becomes leader of China
  • 2013: China’s Belt & Road Initiative and the String Of Pearls
  • 2014: Credit cards of at least 20 million South Koreans are hacked
  • 2014: Jane Yellen succeeds Ben Bernanke as head of US Federal Reserve
  • 2014: The Scots vote to remain in the United Kingdom in the Scottish Referendum
  • 2014: Russia sends troops into the Maidan (The Crimea)
  • 2014: Russia and China sign Trade and Infrastructure Agreements in Beijing
  • 2015: China builds artificial islands in the South China Sea (SCS)
  • 2015: Refugee Crisis, as Europe is hit by a wave of 1 million refugees
  • 2016: Brexit Referendum: The UK votes to leave the EU
  • 2016: Hillary Clinton is the first woman to be nominated as Democrat Presidential Candidate
  • 2017: Donald Trump is inaugurated as the 45th US President
  • 2017: Humanitarian Crisis in Venezuela starts
  • 2018: Jerome Powell succeeds Janet Yellen as head of the US Federal Reserve
  • 2018: US-China Trade War is triggered
  • 2019: The Amazon burns. The most number of fires registered for a decade
  • 2019: Hong Kong protesters take to the streets

2020s

  • 2020: The world goes into Lockdown as Covid spreads and the world see widespread Supply Chain disruptions
  • 2020: Stock Market Crash
  • 2021: Joe Biden becomes the US President
  • 2021: After taking a big hit in 2020, the Stock Market Indicators continue to hit all-time-highs, even though overall global economies are sluggish
  • 2021: A number of commodities see a significant increase in their price: Oats, Coffee, Sugar, Lumber, Iron Ore, Copper, Corn, Soya Beans, Wheat.

In the absence of the Gold Standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.

Alan Greenspan, head of the US Federal Reserve 1987-2006

Flashback to the GFC

In 2008-2009, with the GFC (Great Financial Crisis) the World Economy momentarily stalled. The Banking Industry was shaken to its very foundations. Several Big Names in the Banking Industry went bankrupt: Lehman Brothers, Bear Stearns. A number of other banks were forced into mergers to avoid failure: Lloyds-TSB, Wells Fargo took over Wachovia in 2008.

Since the GFC, Central Banks and Governments have been experimenting with Q.E. (Quantitative Easing or Money Printing if you prefer) on several occasions. These include the US, The European Union, China and the UK.

Quantitative Easing

QE appears to be a preferred tool of many a Central Bank. With each bout of QE, the amounts of money made available in the system increases to heights never seen before.

Recent events have also seen a number of Governments warming to the idea of MMT Modern Monetary Theory and large Deficit Spending. However, this would require a government to have strong control over inflation. The American Fed has been battling since 2020 to induce more inflation. Inflation has officially gone from 1.4% in 2020 to 5.2% in 2021. It appears to be working.

Hopefully, the experience of hyperinflation in The Weimar Republic (1923), Yugoslavia (1994) & Zimbabwe (2008), Venezuela (2019) are in the thoughts of Central Banks and Governments around the world.

On the other end of the scale, Japan is also a reference in terms of economic stagflation and deflation. See the Lost Decade.


WHERE TO NEXT?


It’s noteworthy that China & Russia and a selection of neighbouring countries have started to carry out Petrol and Oil-related transactions in their own currencies, thus avoiding US Dollars and going against the agreements of the mid-1970s.

China & Russia are developing their own alternative to the US-owned SWIFT system. This will enable them to shunt the US-owned SWIFT system and carry out bank transfers within their respective sphere of influence. Neighbouring countries are also showing an interest in this alternative to SWIFT.

For the last 10 or so years, several governments have also started to acquire significant amounts of physical Gold. These include China, Russia, India, Iran & The Netherlands.

Precious Metal Safe Havens

Gold is the traditional safe-haven and alternative to a currency that is in a downward cycle, whether temporary or permanent. The physical Gold market represents more than $11 Trillion as of 2020. During economic troubles, Gold has often been an obvious choice in a storm.

Other precious metals, such as Silver and Platinum, have also been a safe-haven to a certain extent.

Crypto Safe Havens

Blockchain technology has led to the creation of large number of crypto-currencies. Crypto is just the visible tip of the iceberg, as blockchain is in the process of deeply disrupting most industries including the Banking Industry with De-Fi (decentralised Finance).

Crypto assets are also becoming an alternative “haven of sorts”, in spite of the volatility. Currently the Cryptocurrency market capitalisation represents c. $2 Trillion as of going to press. This is the equivalent of the GDP of Italy in 2018 and just for comparison, that is just 18% of the Gold capitalisation. That is just less than the market capitalisation of Apple ($2.4T) or Microsoft ($2.2T).

The market capitalisation of Bitcoin alone is $840B, more than the GDP of the Netherlands in 2020 ($798B). Similarly, the market capitalisation of Ethereum is $350B, just under the GDP of Ireland in 2020 ($366B).

See table for rankings of capitalisations to put values into perspective.

El Salvador has adopted Bitcoin as legal tender in addition to its own currency. Hardly a major economic powerhouse, but a precedent has been set.

Virtual Payment Solutions

Although the candidate has not yet been chosen, Amazon Web Services (AWS) is looking into the possibilities of accepting crypto-currencies as a form of payment.

Walmart are looking to hire a Crypto-Expert to look into solutions for Virtual Payments

Jack Dorsey, CEO of both Twitter and Square Inc, has taken an aggressive interest in Bitcoin. In Q4-2020, Square Inc accumulated Bitcoin in two transactions of $50M and $170M. In addition to this, Square Inc also started offering a payment solution using Bitcoin in parallel with its existing virtual payment system. Square has also recently announced its intention to develop a Bitcoin Hard Wallet for greater security for its users.

Tesla had started accepting Bitcoin for payment, but suspended this, whilst a more “eco-friendly & green approach to mining was found”.

CBDCs

Many Central Banks have officially announced that they are developing their own CBDCs or Central Bank Digital Currencies (CBDC).

China issued its own CBDC in 2020 during a pilot project with 10 Million Yuan distributed to Chinese citizens on a smartphone App. In 2021, in a Public Trial, some of China’s biggest cities plan to promote the CBDC. These include Shenzhen, Shanghai, Suzhou and Chengdu.

In an effort to reinforce Chinese CBDC deployment, the Chinese government has also banned Bitcoin mining on Chinese soil. Clearly, cryptocurrencies are persona non-grata as they gain in popularity. This will no doubt strengthen the Chinese CBDC roll-out. Paradoxically, the disappearance of Chinese-based bitcoin mining activities can only increase decentralisation of Bitcoin. Decentralisation is the essence of an independent blockchain cryptocurrency solution. In spite of the momentary decrease in hash-rate or the ability of the bitcoin network to process bitcoin-related transactions, Bitcoin is likely to become even more attractive than it has been to date.

The American Federal Reserve is also developing its own CBDC. We are yet to see how and exactly when this is likely to be rolled out in the US. It could come sooner than expected.


Which Begs The Questions……


The current state of the World Economy does beg the following questions

  • How could alternative systems to SWIFT affect US dominance over the Financial and Monetary World?
  • The fact that Russia and China are carrying out oil-transactions in their own currency – avoiding the US Dollar – could that have a bearing on the future World economy?
  • Could the reason for China and Russia’s increase in physical Gold reserves be in preparation of a new Monetary System?
  • Are we moving towards a multi-polar world, where US hegemony will diminish until a new equilibrium is found?
  • Could the current US Dollar somehow regain its past dominance?
  • Could Sovereign States feel sufficiently threatened by the increasing adoption of cryptocurrencies, to intervene and hinder/threaten/ban them or apply aggressive taxation?
  • Now that China has outlawed bitcoin mining, could the US government be tempted to welcome bitcoin miners on US soil and finally embrace the Crypto Wave?
  • 50 years on, are we nearing the end of the current Petro-Dollar Era that started in the 1970s?
  • Are we on the cusp of the creation of a new US Dollar (Digital or traditional)?



I’d love to hear your thoughts on the 50 year-anniversary of the current US Dollar system.



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