Suspension of gold convertibility (Nixon shock)

Under the Bretton Woods system, the international monetary order after the Second World War, currencies were fixed to the dollar and the dollar was fixed to gold at $35 an ounce. The United States undertook to convert dollars presented by foreign governments into gold at that price. This was "gold convertibility", and the facility at which foreign central banks could hand in dollars and take away gold was commonly called the "gold window". For the promise to be credible, American gold had to be enough to cover the dollars held abroad.

In the 1960s that premise gave way. As West European and Japanese exports came to compete with American ones, the US balance of payments deteriorated, while foreign aid, military spending and the cost of the Vietnam War spread ever more dollars around the world. By 1966 central banks outside the United States held $14 billion in dollars, against American gold reserves of $13.2 billion, of which only $3.2 billion was available to cover foreign holdings. In March 1968 the London Gold Pool, which had held the gold price at $35, collapsed. West Germany left the fixed rates in May 1971 and Switzerland on 9 August, and on 11 August even Britain, which had founded the system with the United States, asked for $3 billion in gold.

On the afternoon of Friday 13 August Nixon secretly gathered his senior advisers, including Treasury Secretary John Connally, Federal Reserve chairman Arthur Burns and Treasury Under Secretary Paul Volcker, at the Camp David retreat. Two days later, on Sunday evening when the financial markets were closed, he announced his "New Economic Policy". Saying that "we must protect the dollar from the attacks of international money speculators", he announced that he had directed Secretary Connally to "suspend temporarily" the convertibility of the dollar into gold. In the same address he froze wages and prices for 90 days and imposed an additional 10 percent tax on imports. These were the first wage and price controls by the US government since the Korean War.

The measures had different targets at home and abroad. The freeze was aimed at domestic inflation; the suspension of convertibility and the import surcharge were levers to induce the main trading partners to revalue their currencies and lower their trade barriers. Connally famously told European finance ministers worried about the export of American inflation that the dollar "is our currency, but your problem". At home the move was a great success: the next day the Dow Jones average rose 33 points, its largest daily gain to that time, and The New York Times applauded the President's boldness. Abroad it was seen as worrisome unilateralism.

The repairs did not last. In December 1971 the Group of Ten met at the Smithsonian Institution in Washington and signed the Smithsonian Agreement, raising the gold price to $38 an ounce, a 7.9 percent devaluation of the dollar, while the other currencies were revalued; the import surcharge was dropped. But the dollar was devalued by a further 10 percent in February 1973, and in March six members of the European Community tied their currencies together and floated them jointly against the dollar, ending the attempts to restore fixed rates. Nixon had promised to resume convertibility after reform, but the reform never came.

The usual verdict is "a political success but an economic failure". Nixon won the 1972 election by a landslide, but the suspension of convertibility is counted among the causes of the 1973 to 1975 recession, the stagflation of the 1970s and the instability of floating currencies. Volcker later regretted the abandonment of Bretton Woods and the failure to establish a fixed-rate replacement. The Marxist economist Ernest Mandel read the episode differently: the rise of West German and Japanese imperialism in the 1960s had cost the United States the absolute hegemony it had won in 1945, and the cascading devaluation of the dollar was the American bourgeoisie's attempt to improve its position on the world market.