Fifty years ago, almost to the day, President Richard Nixon severed the USA’s ties to gold, ending the Bretton Woods gold standard system that had been set up 27 years earlier.
The shockwaves from Nixon’s decision to break the link with gold have continued to ripple through the years since and can still be heavily felt today.
The Nixon Shock
In 1944, in an attempt to avoid the currency instability and devaluations seen before WWII, exchange rates were fixed relative to the dollar under the ‘Bretton Woods’ Agreement. Under this agreement, Western currencies such as the pound were linked to the dollar at a fixed rate, and the dollar was fixed to gold at a rate of $35 per ounce.
However, 27 years later President Richard Nixon slammed the door shut on America’s link with gold, in a move which is now known as the ‘Nixon Shock’. Nixon appeared on a tv broadcast, announcing the end of the gold standard and henceforth ushering in a new era of fiat currencies, backed by only confidence in the central banks and governments.
In truth, the system established back in 1944 was already broken at the point of Nixon’s announcement. The Bretton Woods agreement had stated that any country that built up dollars through running trade surplus through the US could exchange them for gold, but this saw their gold reserves deplete rapidly. At the point of the Nixon Shock, they were struggling to hold enough gold in order to meet their commitments. Confidence in the dollar was also low at this time due to rising US inflation and the massive expenditure fuelling the Vietnam war. Nixon, at the time, was also thinking of his upcoming presidential election run, hoping that closing the door to gold would help him appear serious in improving the country’s economic issues.
Nixon’s announcement to close the door on gold 50 years ago was stated to be a temporary measure, as he merely adjusted the Bretton Woods agreement. However, this was not the case, and the decision has had long-lasting ramifications. Since this point in time, the US economy has never been the same, and the Nixon administration, in fact, ushered in 50 years of uncontrollable fiat currency.
Without the dollar as the backbone of the international system, inflation intensified, and the price of commodities increased greatly as the US and other Western countries struggled to cope. Many countries moved production to other parts of the world such as China, where costs were cheaper, affecting corporate profitability and helping to turn China into an industrial superpower.
The end of the Bretton Woods agreement ended fixed exchange rates, leaving flexible rates ever since. Free markets in currencies, debt and commodities have prospered unlike they ever could under Bretton Woods. Nixon opened up the floodgates to the world of fiat currency and provoked the Federal Reserve to grow.
The creation of the euro, the arrival of cryptocurrencies such as Bitcoin, and the ability to print unlimited quantities of fiat currency, are all able to be traced back to the end of the US’ link with gold.
A New Nixon Shock?
The fiftieth anniversary of the end of the Bretton Woods agreement arrives amid tough times in the world. In the wake of the coronavirus pandemic, as economies attempt to recover, inflation has spiked high, and the pandemic has appeared to threaten to expose the impact that the loss of the gold standard has had on federal debt and behaviour.
The world’s financial system has never replaced gold and still relies on the power of uncontrollable fiat currency as it did in Nixon’s day.
If inflation continues to rise, and the world loses faith in the central banks’ ability to control it, global financial architecture could soon see a shift.
Could we see a shock to rival Nixon’s?
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