These days mark the 50th anniversary of the decision taken by Richard Nixon to end the Bretton Woods system, in force since the end of World War II, and annul the convertibility of dollars into gold. That decision spelled the end of the last remaining vestige of the gold standard , though the time since has shown the failure of currencies based solely on trust and the continued importance of gold as a tangible asset.
It was on August 15, 1971 , a Sunday afternoon, when the then President of the United States Richard Nixon , after meeting with his advisers at his Camp David residence, publicly announced a historic decision: the temporary suspension (actually it would be definitive) of the convertibility of the dollar into gold .
This measure, described as “the closing of the golden window” , supposed to end the commitment acquired by the United States in the Bretton Woods Agreements , negotiated in 1944 and signed in 1945 by President Truman , to exchange the dollars in possession of foreign countries for gold from their national reserves, with an exchange fixed at $35 an ounce .
The Bretton Woods Agreements
It was a formula to achieve that the US dollar became the international reserve currency, which constituted the reference for the exchange of other currencies, with a fixed rate. In turn, the dollar would be linked to gold, with the aforementioned change of $35 an ounce.
The commitment of the United States to exchange dollar bills for physical gold at any time served to dispel the reluctance that some countries might have regarding this new international system.
The system worked for several decades, which helped international trade to recover from the damage caused by World War II, beginning in the 1950s.
However, already in the 1960s the problems derived from this commitment began to be noticed. In practice, the Bretton Woods system, a version of the so-called gold standard , limited the amount of dollars that the US government could print, since each one had to be backed by a part of the gold deposited in its reserves.
In fact, the commitment to redeem the dollars cost the United States dearly: between the early 1950s and Nixon’s decision in 1971, its national gold reserves fell by 55%.
The closing of the golden window
In 1971, the economic situation in the United States was becoming unsustainable: the growing military expenses derived from the Vietnam War had caused a rise in monetary inflation that forced drastic decisions.
As Richard Nixon announced in his appearance on August 15, 1971, the decision to suspend convertibility was intended “to protect the position of the American dollar as a pillar of world monetary stability . “
In practice, this meant that the dollar was no longer backed by a commodity such as gold and was based solely on the confidence that the US Federal Reserve inspired as an institution; that is, it became a fiduciary or fiat currency.
This meant that the United States could print as many dollars as it wanted, without fear that citizens, foreign governments, or central banks would request their conversion into gold.
A fiat currency system
As Alex J. Pollock points out on the Law & Liberty blog , this new system, which is still in place today, means that the entire world runs on fiat currencies, none of which can be redeemed for gold or any other commodity that works for it.
Furthermore, instead of having a fixed exchange rate, based on convertibility into gold, exchange rates between currencies fluctuate constantly, depending on the functioning of the markets and the interventions of central banks.
In other words: the central banks of the world are free to print as many banknotes as the respective governments want.
According to Pollock, instead of cutting the dollar’s link with gold, the Nixon administration could have devalued the US currency, going from the official price of $35 an ounce of gold to $70.
However, it was not an attractive measure from a political point of view, nor was it known for sure what the ideal figure was; everything depended on the gold that was possessed.
To this day, the inflation of these 50 years has affected the dollar to the point that the same ounce of gold that then traded at 35 dollars, now does so at 1,800: a devaluation of 98% .
Gold always maintains its value
Was Nixon’s decision the right one? At that time, public opinion was favorable and the stock markets reacted upwards.
However, over the years, most economists who have referred to this issue have concluded that ending the discipline established by the Bretton Woods system, which prevented the indiscriminate printing of banknotes and, therefore, the risk of provoking a inflationary credit expansion, was a premature and risky measure.
Not surprisingly, in the years immediately following, the so-called Great Inflation of the 1970s broke out . According to economist Robert Aliber , the Nixon-imposed system of fiat money and floating exchange rates has caused a series of recurring financial crises in the world, during the 1970s, 1980s, 1990s, 2000s, and 2010s.
Faced with this, gold stands as a refuge asset that has maintained its value ever since and has appreciated considerably against the US dollar since 1971: one only has to think that the same ounce of metal that year was exchanged at 35 dollars, it was worth more than $2,000 about a year ago, and is now around $1,800. Dollars or gold? The question is quite clear .
