“Gold bugs” take it for granted that it was no coincidence that the US got hit with stagflation in the 1970’s, because Richard Nixon infamously severed the dollar’s last tie to gold in 1971. Others, however, dispute this connection. So I thought it worthwhile to make a simple case in defense of the gold bugs:
Follow this link to see the chart on the FED site: Observations on Inflation
In the above chart, the blue line is year/year percentage increase in the Consumer Price Index (CPI); it’s what most people nowadays mean when they ask, “How high is inflation running?” The red line shows yr/yr percentage increases in M2, which is a particular measure of the quantity of money which includes currency but also commercial checking account balances. It is a popular measure of how much money “the public is holding.”
As the chart shows, yes indeed there was a sharp jump in the rate of money growth after Nixon cut the link to gold. More generally, there were two long periods where the rate of money growth in the 1970s was head-and-shoulders higher than it had been in the 1960s. The only time money growth crashed in the 1970s appears to be an effort to get price inflation (the blue line) to come back down. This accords with commonsense stories about the printing press and the business cycle: The authorities can print money and goose the economy, but as price inflation gets out of control they have to slam the brakes and cause a bad recession to get it back under control.
But notice something else: Year/year CPI inflation didn’t break the 10% mark until February 1974, several years after Nixon severed the tie to gold. Consumer prices didn’t instantly respond to the new monetary policy. Also, the chart clearly shows that price inflation rates bounced all over the place during the 1970s; it wasn’t a continuous upswing throughout the decade.