The 1971 Nixon Shock and the End of the Gold Standard

On Sunday evening, 15 August 1971, Richard Nixon delivered a televised address that pre-empted the popular show Bonanza. He announced wage and price controls, an import surcharge, and almost as an aside the suspension of the dollar's convertibility into gold. The world's monetary system was permanently altered.

The pressure that built

By 1971, US gold reserves had fallen to under 9,000 tonnes from a 1949 peak of 22,000 tonnes. Foreign central banks held dollar claims that, if all converted, would have drained the entire US gold stock several times over. France under de Gaulle had been particularly aggressive in converting dollars to gold throughout the 1960s, partly as a political statement. The Bretton Woods peg was unsustainable.

• 1949 US gold stock: ~22,000 tonnes
• 1971 US gold stock: ~8,800 tonnes
• Gold price 1971: $35/oz (peg)
• Gold price 1980 peak: $850/oz
• Dollar trade-weighted decline 1971-1980: ~30%

The Camp David weekend

Nixon convened his economic team Treasury Secretary John Connally, OMB Director George Shultz, Fed Chairman Arthur Burns, and others at Camp David from 13 to 15 August. The decision to close the gold window was driven primarily by Connally and supported by Treasury Undersecretary for International Monetary Affairs Paul Volcker. Burns reportedly objected. The package was framed as a defence of American economic sovereignty.

"It's our currency, but it's your problem." John Connally to European finance ministers, 1971

What replaced Bretton Woods

The world drifted into floating exchange rates, formalised at the Smithsonian Agreement in December 1971 and again in the 1973 collapse of the brief Smithsonian peg. By 1976 the Jamaica Accords had legally retired gold's monetary role. Currencies floated against one another, with central banks intervening as they saw fit.

The consequences

The 1970s saw inflation, stagflation, two oil shocks, and a gold price that rose nearly 25-fold by January 1980. Volcker, by then Fed Chairman, eventually broke inflation in 1979-1982 with double-digit interest rates. The fiat era had begun, and central banks discovered they could expand balance sheets at a pace impossible under any metallic standard.

Bottom line: the Nixon Shock is the dividing line of modern monetary history. Everything before it operated under metallic discipline of some form. Everything after it has been a long experiment in central-bank-managed fiat. The experiment is not yet concluded.