Nixon Shock
Nixon's surprise 1971 decision to stop converting dollars into gold, which ended the Bretton Woods system and created today's floating-currency world.
On a Sunday evening in August 1971, Richard Nixon preempted the western Bonanza to tell Americans that the dollar in their pockets was about to change, though he never quite said so. In a roughly twenty-minute address he announced that the United States would no longer honor its standing promise to hand foreign governments gold in exchange for their dollars. With that, the Bretton Woods system, the monetary order that had run the postwar West since 1944, was finished. Historians call the moment the Nixon Shock, and it created the floating-currency world we still live in.
Why he slammed the window
Bretton Woods rested on a pledge the US could no longer keep. Every major currency was pegged to the dollar, and the dollar was pegged to gold at 35 dollars an ounce, redeemable on demand. But as America spent on Vietnam and the Great Society, dollars flooded abroad, and by 1971 foreign claims on US gold far exceeded the metal in Fort Knox. This was the Triffin dilemma coming due: to supply the world with dollars, America had to run deficits that turned the gold promise into a bluff. France had been calling that bluff for years, shipping dollars back for bullion, and when Britain reportedly asked to convert billions more in early August, Nixon's team moved to shut the window before the run became a stampede.
The package and the fallout
Nixon did not act alone or gently. Over a secret weekend at Camp David with Treasury Secretary John Connally and a young Paul Volcker, he assembled a shock package: a 90-day freeze on wages and prices, the first in peacetime, and a 10 percent surcharge on imports to bully allies into revaluing their currencies. At home the tough talk played well and markets rose. Abroad it landed as a betrayal, and finance ministers scrambled. The Smithsonian Agreement that December tried to patch the pegs, but the repairs failed, and by 1973 the major currencies were floating freely, their values set by markets rather than treaties.
The world it made
The result was fiat money on a planetary scale. The dollar stayed the world's reserve currency, but it was now backed by nothing tangible, only faith in the US economy and the reach of US power. Exchange rates became a daily auction, and a vast trade in currencies grew up to price and hedge the swings. Central banks lost the discipline of gold and gained the freedom, and the temptation, to print. Nearly every modern argument about inflation, floating currencies, and whether the dollar's dominance can last traces back to that Sunday broadcast. Nixon promised the move would bring stability. Instead it opened half a century in which the worth of money is a question markets answer fresh each morning.