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No gold for you, paper

President Richard Nixon

President Richard Nixon

Monday was the 45th anniversary of then President Richard Nixon’s Aug. 15, 1971, speech in which he said, “I have directed [Treasury] Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.”

After then President Franklin D. Roosevelt signed Executive Order 6102 on April 5, 1933, it became illegal for Americans to own more than $100 face value of gold coins or Gold Certificates or small quantities of gold bullion.  Outstanding bonds that had clauses promising to make payments in gold coins had the provisions declared null and void.

Americans were still allowed to own “coins of recognized special value to collectors.” Foreigners who owned gold held in the custody of American citizens or businesses also had these assets seized.

Some rare coin marketers erroneously and, in my mind, deceptively refer to this action as gold “confiscation.” Although compliance was mandatory, the U.S. government paid the parties who lost gold with Federal Reserve Notes that, at the time, 100 percent compensated for the value of the seized assets. In my mind I think a more accurate term to describe the actions of this Executive Order is that it was a “fully compensated mandatory gold recall.”

Still, to maintain the image that the U.S. dollar was backed by gold, the U.S. government continued to accept U.S. currency from central banks and disburse gold at the rate of $20.67 per ounce (increased to $35 per ounce in 1934 with passage of the Gold Reserve Act).  Rather than being a classic gold standard, this process of limited redeemability is often described as a gold exchange standard.

As decades passed, the U.S. government inflated the outstanding quantity of its paper money relative to the amount of gold reserves. It became obvious to some that the price of gold, as measured in U.S. dollars, was too low. In the 1960s, the central banks of France and the Netherlands sought to take advantage of the U.S. government’s willingness to, effectively, sell gold at an under-market rate. They aggressively redeemed U.S. currency to receive physical gold.

The quantity of gold redemptions along with the rising costs of U.S. military actions in Vietnam put pressure on the dollar – resulting in President Nixon closing the gold exchange window.

So, did President Nixon’s action prove to be temporary and did it stabilize the value of the U.S. dollar? The answer, sadly, is a strong No to both questions.

Now, 45 years later, the gold exchange window is still “temporarily” closed.  There is no discussion in Washington about the prospect of resuming any form of gold exchange, no matter what the price.

Since the gold exchange window was closed on Aug. 15, 1971, the price of gold as measured in U.S. dollars has risen from $35.  As I type this Tuesday morning, the spot price of gold is at $1,344. In effect, far from being stable, the value of the U.S. dollar has fallen 97.4 percent against an ounce of gold over the past 45 years.  Stated the other way, the price of gold is now almost 30 times what it was when President Nixon closed the gold exchange window.  It is almost certain that the political impact of closing the gold exchange window accelerated the decline in the value of the U.S. dollar.

Incidentally, the restrictions on owning Gold Certificates were removed in 1964, though the ability to turn them into the U.S. government and redeem them for the promised gold has never been restored. Americans were again allowed to own gold coins and ingots beginning Dec. 31, 1974. The bond clauses promising to make payments in gold coins are still not enforceable.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner.  He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Other commentaries are available at Coin Week.  His radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing.

 

 
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