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Forty years ago, Nixon cut the U.S. dollar’s link with gold. The ‘watershed event’ changed the face of global finance, but remains a controversial decision
It was mid-August of 1971 when U.S. President Richard Nixon took to the airwaves in a televised address to drop a bombshell on the international financial system: He was severing the final link of the U.S. dollar to gold.
Monday, August 15 will mark the 40th anniversary of Mr. Nixon’s historic announcement that the U.S. would no longer honour a pledge to foreign governments to redeem U.S. dollars for gold, which was then trading on the open market for what now seems like the ridiculously low price of about $40 (U.S.) a troy ounce.
His decision ushered in the modern era of floating exchange rates and paper-money currencies that today dominate the global marketplace. It also initiated an incredible bull market in gold itself.
“It was a watershed event,” says Lacy Hunt, economist at Hoisington Investment Management, an Austin-based money manager, who at the time of the announcement was a senior financial economist at the Dallas Federal Reserve Bank.
The decision to cut the bond between the dollar and gold marked the end of the road for the global monetary system that had been set up in the closing days of the Second World War. Under terms of the agreement reached at Bretton Woods, New Hampshire, in 1944, the United States had agreed to redeem dollars for bullion at the rate of $35 an ounce, but only for the central banks of other countries. These countries, in turn, pegged the value of their currencies to the U.S. dollar.
The system worked well until the mid-1960s, when it started to fray after the U.S. flooded the world with too many dollars to help finance its domestic social programs, the Vietnam War, and its global military spending.
The U.S. was facing a chronic trade deficit. Investors and other governments began to worry that the United States wasn’t as good as its word to redeem dollars for gold at $35, causing a run on the U.S. gold reserve, a flight out of dollars and the eventual collapse of the arrangement.
“[The Nixon announcement is] an important piece of history,” observed Gary Shilling, president of Gary Shilling & Co. Inc., a New Jersey money manager and economic consulting firm.
Mr. Nixon’s presidency later went down in flames over the Watergate scandal, but analysts say he shouldn’t be blamed for driving the final spike through the heart of the gold standard. Much like the current occupant of the White House, who has been grappling with a huge, inherited deficit problem and the fallout from the 2008-09 financial panic, Mr. Nixon was in office when long-running pressures against the dollar finally became overwhelming.
The collapse of the gold standard “was inevitable,” says Mr. Shilling. “[President Nixon] really didn’t have any choice.”
But his actions have prompted intense debate ever since. Some economists of a conservative bent lament that the formal end of the gold standard placed the world in uncharted territory with paper currencies that have no intrinsic value. Governments are now free to print up these so-called fiat currencies at will.
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