Given the 40th anniversary of President’s Nixon’s “closing of the gold window,” we shouldn’t forget the role that such action had in enabling the federal spending spree that has been going on for decades.
Let’s go back, first of all, to the first 140 years or so of American history, when the official money of the American people consisted of gold coins and silver coins.
What was the reason that Americans chose precious metals, rather than paper money, as their official money? To protect themselves from government officials who would debase the value of paper money by printing and issuing too much of it to pay for their ever-growing government programs.
The Framers were well-versed in history and, therefore, knew how governments used inflation to plunder and loot the people. Just recently, they had experienced the Continental Congress’ over-issuance of the Continental currency. The over-issuance of that paper money gave rise to the phrase, “Not worth a Continental.”
Thus, when Americans used the Constitution to call into existence the federal government, it was with the clear understanding that the federal government’s powers were limited to making gold and silver coins the official money of the nation. There was no power delegated to the federal government to issue paper money or to make paper money legal tender.
Thus, from 1787 to 1933, gold coins and silver coins were what the American people used as money. That’s what was meant by “the gold standard.”
At the same time, the federal government was borrowing money, meaning that the government was borrowing gold coins and silver coins. To evidence the debt, the government issued promissory notes, or bills (short-term promissory notes), or bonds (long-term promissory notes).
Whenever a note, bill, or bond came due, the government would pay off the debt in gold or silver. Everyone understood that the notes, bills, and bonds, were not money but instead promises to pay money (i.e., gold and silver). Everyone understood under the Constitution the federal government lacked the power to “emit bills of credit,” which meant issuing paper money.
Over time, the government figured out that it could issue more notes, bills, and bonds without concern that everyone would show up at the same time and demand their gold. But federal officials knew that there was a limit to this. As people began sensing that the over-issuance of debt was excessive, they’d start demanding gold as the notes, bills, and bonds became due. If the government couldn’t honor all its debts, it would have to default, which obviously would mean big problems trying to borrow money in the future. Thus, the gold standard constrained would-be big spenders in government, which is precisely what the Framers intended. Government couldn’t overspend because it couldn’t over-borrow and over-inflate. If it tried to over-inflate to cover over-borrowing, it lacked the money (gold) to pay off its debts.
Then, along came Franklin Roosevelt, the original big spender of America’s welfare state. What was his solution to the Great Depression that the Federal Reserve, America’s central bank, had caused? To transform America’s economic system from one based on the principles of economic liberty and free enterprise to one of socialism, regulation, and interventionism.
The socialist part meant the welfare state, which consisted of the federal government’s being transformed into a massive welfare provider for the American people. Here were the roots of America’s modern-day, big-spending welfare state. Here was the start of the crown jewel of the welfare state, Social Security.
But Roosevelt obviously had a problem. Standing in his way of making the federal government people’s welfare provider was the gold standard. Sure, Roosevelt could raise the taxes needed to cover his welfare programs. But he was a big, big spender. He wanted to spend much more than what taxes were bringing in. He wanted to tax and borrow and inflate.
To overcome the problem, FDR did one of the most amazing things in history. He just confiscated everyone’s gold and made it illegal to own it. Imagine: what had been the people’s official money for more than a century was now illegal to own — a felony.
That meant that the federal government could now convert its paper debts into paper money. That is, it could now do what governments all over the world were doing and had been doing for centuries — spending, borrowing, and inflating — and plundering and looting the people in the process.
But there was still one check on the big spenders. Foreign central banks were still permitted to redeem their U.S. debts for gold. But the spending, borrowing, and inflating continued growing into the 1940s, 1950s, and 1960s, especially with the growth of warfare-state spending. Thus, as the foreign banks began redeeming their debts for gold, the federal government knew that it could never honor them all.
So, that’s why Nixon “closed the gold window.” He knew the federal government couldn’t pay its debts and so it just defaulted. It refused to honor its contracts with foreign holders of U.S. debt, as it has done back in 1933 when it defaulted on its debt obligations to the citizenry.
Ever since 1971, the year that Nixon closed the gold window, there have been no constraints on Washington’s big spenders. Decade after decades, they have spent and borrowed, and the Federal Reserve has inflated and inflated. That’s why the dollar has a value of about 5 percent compared to when the Federal Reserve was established in 1913.
Through it all, people have been looted and plundered through the continuous debasement of the currency, with the inflationary burden oftentimes falling most heavily on the poor and middle class.
There is only one solution to this monetary debauchery and, not surprisingly, it is a libertarian one: Abolish the central bank, paper money, and legal-tender laws, and separate money and the state.