The Nixon Shock of 1971: The Day the Dollar Left Gold

The Nixon Shock was the set of economic measures President Richard Nixon announced on 15 August 1971, the most important of which suspended the right of foreign governments to swap US dollars for gold. Until that evening the dollar was fixed at $35 an ounce, and every other major currency was pegged to the dollar. Within two years the system had collapsed and the main currencies were floating freely.

Almost every price you see on a trading platform today exists because of that decision.

Why the gold link was under strain

Under the Bretton Woods system agreed in 1944, other central banks could hand dollars to the US Treasury and receive gold at $35 an ounce. That promise worked while America held most of the world's gold and few dollars circulated abroad. By the late 1960s both conditions had reversed. Spending on the Vietnam War and new domestic programmes, together with a growing trade deficit, sent a flood of dollars overseas.

Foreign governments began to doubt that the US could honour its promise. If everyone asked for gold at once, there would not be enough. France and other countries converted some of their dollar holdings, and in the spring and summer of 1971 money poured out of the dollar into German marks and Swiss francs. Germany let the mark float in May. A run on America's gold looked increasingly likely.

The weekend at Camp David

On Friday 13 August Nixon took his senior economic advisers to the presidential retreat at Camp David. The group included Treasury Secretary John Connally, Federal Reserve Chair Arthur Burns and Paul Volcker, then a senior Treasury official who would later chair the Fed. Over the weekend they settled a package designed to stop the run on gold, push other countries to revalue their currencies and tackle inflation at home.

Timing mattered. Nixon spoke on Sunday evening, when financial markets in the US and Europe were closed, so the announcement could not trigger panic selling mid-session. He framed the measures as a defence of the dollar against "international money speculators".

How markets and allies reacted

Many foreign exchange markets stayed shut for days after the speech while governments worked out what to do. When they reopened, most major currencies were allowed to float upward against the dollar. Allies were angry that they had not been consulted, and the import surcharge was seen as a weapon to force them to revalue. Connally is widely quoted as telling European officials that the dollar was "our currency, but your problem", a line that summed up the American position.

At home the speech was popular. Stock prices rose sharply when markets reopened, and the wage and price freeze was welcomed by voters worried about inflation, although economists later judged the controls a failure that only delayed price rises.

From the Smithsonian Agreement to floating

In December 1971 the leading economies met at the Smithsonian Institution in Washington and agreed new fixed rates. The official gold price was raised to $38, other currencies were revalued against the dollar, the bands around the new rates were widened and the import surcharge was dropped. Nixon called it "the most significant monetary agreement in the history of the world".

It lasted little more than a year. Pressure on the dollar returned, the US devalued again in February 1973, to $42.22 an ounce, and by March the major currencies were floating. The era of fixed exchange rates was over, and the modern foreign exchange market was born.

Why it still matters to traders

Floating rates made currencies something you could trade for profit. Prices began to move every day with interest rates, growth, trade and politics, and banks built dealing rooms to profit from those moves. The market that turns over about $9.6 trillion a day today is a direct result.

The episode also explains the central role of the dollar. Even without gold behind it, the dollar stayed the world's main reserve and trading currency, because the US economy and financial markets were the deepest available. And it shows how much power governments retain: a single weekend decision rewrote the rules for every currency on earth.

Gold, inflation and the 1970s

Cutting the link to gold removed a brake on money creation, and the decade that followed was one of high inflation across the developed world. Oil price shocks in 1973 and 1979 added to the pressure. Once gold could trade freely, its market price climbed far above the old official levels, a sign of how much confidence in paper money had weakened.

Inflation was eventually tamed by Paul Volcker, the Treasury official who had been at Camp David in 1971. As Fed chair from 1979 he raised interest rates to record levels, which sent the dollar sharply higher in the early 1980s. That surge in turn led to the 1985 Plaza Accord, when governments agreed to push the dollar back down. Each chapter of modern currency history follows from the one before.

Lessons for today's traders

• Weekend announcements create gaps. Big policy decisions often come when markets are closed, so prices can open far from Friday's close.
• Promises about currencies are political. A fixed price lasts only as long as the government behind it can afford it.
• The dollar's role is not guaranteed by gold. It rests on the size and depth of the US economy and markets.
• Policy drives the biggest moves. Then as now, governments and central banks cause the largest shifts in exchange rates.

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