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No more restraint on dollars issued

Last week I wrote about the 45th anniversary of President Richard Nixon’s Aug. 15, 1971, temporarily closing the gold exchange window, where central banks had previously been able to turn in U.S. currency and receive physical gold. Nixon claimed that the closure would be temporary and that it was being done to support the stability of the U.S. dollar.


I pointed out that this act was still in force and, therefore, not temporary. Further, since the gold exchange window was closed the price of gold relative to the U.S. dollar had since increased almost 30 times. Therefore, monetary stability was never achieved.

A significant point I neglected to include last week was that the closing of the gold exchange window was a key step that led to the soaring gold price (or, stated from the other perspective – a crashing U.S. dollar value).

For millennia, governments usually tied the value of their outstanding monetary issues to either gold or silver. If the coins themselves did not contain full value of precious metals, they could be exchanged for gold or silver in coin or ingot form. When paper currencies started to be used, their public acceptance also depended on how easily they could be exchanged for gold or silver.

The term ducat, for example, came to be standardized at 3.5 grams gross weight at 98-2/3 percent purity. Ducats could be called any monetary unit the government wanted, but it traded because of the value of its gold content.

From the perspective of governments, though, tying their monetary systems to precious metals often proved to be quite restrictive. If a government wanted to spend more than the value of the underlying gold and silver it possessed, it either had to deceive those who accepted government-issued money (which didn’t work all that long), or it just could not spend as much as desired. Over thousands of years, the governments that cheated the public by reducing purity of the gold or silver, the weight, or by clipping the edges of previously issued coins eventually saw their monetary systems fail. Paper currencies also depreciated, usually much faster than happened with coins.

After the U.S. government revalued the price of gold in 1934 from $20.67 to $35 per ounce, the dollars were 100 percent backed by gold. Then things went downhill. After the end of World War II, it fell to less than 60 percent backed. It kept falling even further in succeeding years.

In January 1959, the U.S. M2 money supply was $286.6 billion. At the time, the U.S. gold reserves were less than 590 million ounces. At $35 per ounce, that meant that outstanding U.S. currency was barely 7 percent backed by gold.

When President Nixon closed the gold window in August 1971, the M2 money supply was about $690 billion and the gold reserves were about 290 million ounces. In effect, the U.S. government had less than 1.5 percent gold backing to outstanding money.

Now fast forward 45 years. By July 2016, the M2 money supply has zoomed up to $12.893 trillion. The U.S. Bureau of the Fiscal Service reported that the government’s gold reserve was 261,498,926.23 ounces of gold valued at $11,041,059,946.46 (see report here). The gold backing for US currency had plummeted all the way to 0.086 percent.

(Note: The foregoing numbers assume that the U.S. government’s claims of gold reserves are accurate. A few years back, the general counsel of the Federal Reserve Bank testified to a Congressional committee that the U.S. government and Federal Reserve had physical custody of the total of reserves. Even if this is true, and there is some evidence casting doubt on such a claim, no member of Congress asked the obvious follow-up question of who had title to the gold reserves in U.S. government custody. There is other circumstantial evidence that the U.S. government may have transferred title to a significant portion of its gold reserves to other central banks.)

As you can see, the depreciation of the U.S. dollar accelerated once the gold exchange window was closed. From 1959 to 1971, the M2 money supply increased 140 percent. Since August 1971, it has soared 1,769 percent. Why so much?

The closing of the gold exchange window removed a key fiscal restraint on the U.S. government’s issue of dollars. When issuance is not restrained, governments invariably go on a spending spree. But the spending spree did not only involve an increase in the money supply.

According to the U.S. government, its total outstanding U.S. debt at June 30, 1959 was $284,705,970,078. By June 30, 1971, it had grown to $398,129,744,456, only about 40 percent. By September 30, 2015, the U.S. government’s debt had expanded to $18,150,671,666,484, a 376 percent increase from mid-1971 (see report here)!

Only considering the U.S. money supply and the government’s debt does not take into account the full spending of the U.S. government. Unfunded liabilities owed in the future have grown even faster than debt levels. Depending on the assumptions used in the calculation, you can find estimates all the way from a present value of $70 trillion to $200 trillion combined debt and unfunded liabilities of the U.S. government.

Had the U.S. government kept the gold exchange window open, it would have been forced to maintain greater fiscal responsibility. That would have included reining in its spending, probably along the lines of growth from 1933 to 1971. It is also virtually certain that total U.S. government debt and unfunded liabilities would be tiny fractions of what they are today. The inflation of the money supply would similarly have been far smaller. As a consequence, while the price of gold would likely be higher today than in was on Aug. 15, 1971, it might only now be somewhere from $100 to $200 per ounce.

If you want other real world comparisons, the average U.S. price for a gallon of gasoline in 1971 was 36 cents, a first class postage stamp was 8 cents, and a can of Campbell’s condensed tomato soup cost just over 10 cents. The federal minimum wage rate was $1.60 per hour.

Has the U.S. Mint halted silver Eagle production?
Another dealer claimed late last week to be told by an official from one of the U.S. Mint’s Authorized Purchasers that production of the 2016 silver Eagles had been halted. In queries early this week of our own contacts at Authorized Purchasers we were told that this was at least “effectively accurate.”

Since the beginning of 2016 into early July, the U.S. Mint had been unable to produce sufficient silver Eagles to meet continuing demand, despite striking them at a record pace. But, by mid-July, demand for physical bullion products in the U.S. declined sharply. Weekly silver Eagle sales that had been averaging about one million coins fell off to 100,000 to 200,000.

Despite the sales drop, the Mint continued producing large quantities of silver Eagles. By mid-August, it apparently had stockpiled a few million coins. In years past, the Mint had halted production of these coins multiple times when demand tapered off. So, it is no surprise that this appears to have happened again.

If sales volume remains around recent levels, the Mint may not sell out its inventory stockpile by the end of the year. But, if demand again picks up to a million or more coins per week, existing supplies will be gone in a few weeks. How will demand fare for the balance of the year? It will probably be somewhat lighter than before simply because the premium over silver value at which U.S. 90 percent silver coins are selling is now so much lower than that of silver Eagles. Still, demand could zoom should any of a number of possible financial crises erupt.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He was also honored by the Numismatic Literary Guild in 2016 for the Best Dealer-Published Magazine/Newspaper and for Best Radio Report. 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. Some of 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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