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[[File:Nixon 30-0316a.jpg|thumb|Richard Nixon in 1971]]
{{Economics sidebar}}
The '''Nixon shock'''
Although Nixon's actions did not formally abolish the existing [[Bretton Woods system]] of international financial exchange, the suspension of one of its key components effectively rendered the Bretton Woods system inoperative.<ref name=":1">{{Cite book|last=Oatley|first=Thomas|url=https://books.google.com/books?id=4GJoDwAAQBAJ|title=International Political Economy | edition = 6th |date=2019|publisher=Routledge|isbn= 978-1-351-03464-7|pages= 351–52}}</ref> While Nixon publicly stated his intention to resume direct convertibility of the dollar after reforms to the Bretton Woods system had been implemented, all attempts at reform proved unsuccessful. By 1973, the current regime based on [[floating currency|freely floating]] [[fiat currency|fiat]] currencies ''[[de facto]]'' replaced the Bretton Woods system for other [[global currency|global currencies]].<ref>{{cite news |last1= Lowenstein |first1=Roger |title=The Nixon Shock |url= https://www.bloomberg.com/news/articles/2011-08-04/the-nixon-shock |access-date=25 March 2019 |work= Bloomberg |date=August 5, 2011}}</ref>
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[[File:Price of gold.webp|thumb|Price of gold 1915–2022]]
[[File:Price of oil nominal price.webp|thumb|Price of oil
==Background==
{{see also|Closure of the Suez Canal (1967–1975)}}
===Bretton Woods system===
In 1944, representatives from 44 nations met in [[Bretton Woods, New Hampshire]], to develop a new international monetary system that came to be known as the Bretton Woods system. Conference attendees had hoped that this new system would "ensure exchange rate stability, prevent competitive devaluations, and promote economic growth".<ref>{{cite web|last=Ghizoni|first=Sandra|title=Establishment of the Bretton Woods System|url=https://www.federalreservehistory.org/essays/bretton-woods-created|publisher=US Federal Reserve|access-date=April 12, 2023}}</ref> It was not until 1958 that the Bretton Woods system became fully operational. Countries now settled their international accounts in dollars that could be converted to gold at a [[fixed exchange-rate system|fixed exchange rate]] of $35 per ounce, which was redeemable by the [[Federal government of the United States|U.S. government]]. Thus, the United States was committed to backing every dollar overseas with gold, and other currencies were pegged to the dollar.
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However, from 1950 to 1969, as Germany and Japan recovered, the US share of the world's economic output dropped significantly, from 35% to 27%. Furthermore, a negative [[balance of payments]], growing [[public debt]] incurred by the [[Vietnam War]], and [[monetary inflation]] by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s.<ref name="Lowenstein"/>
===Criticism and decline===
In France, the Bretton Woods system was called "[[Exorbitant privilege|America's exorbitant privilege]]"<ref name="books.google.com">Barry Eichengreen, ''Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International monetary system''[https://books.google.com/books?id=TIlpAgAAQBAJ&pg=PA4]</ref> as it resulted in an "asymmetric financial system" where non-US citizens "see themselves supporting American living standards and subsidizing American multinationals".
By 1966, non-US central banks held $14 billion US dollars, while the United States had only $13.2 billion in gold reserve. Of those reserves, only $3.2 billion was able to cover foreign holdings as the rest was covering domestic holdings.<ref>{{cite web|title=Money Matters: An IMF Exhibit – The Importance of Global Cooperation – The Incredible Shrinking Gold Supply |url=http://www.imf.org/external/np/exr/center/mm/eng/sc_sub_3.htm|publisher=International Monetary Fund|access-date=18 March 2014}}</ref>
By 1971, the [[money supply]] had increased by 10%.<ref>{{cite web|url=http://research.stlouisfed.org/fred2/series/M2SL |title=M2 Money Stock | FRED | St. Louis Fed |website=Research.stlouisfed.org |date=January 1959 |access-date=2017-03-18}}</ref> In May 1971, [[West Germany]] left the Bretton Woods system, unwilling to sell further [[Deutsche Mark]] for dollars.<ref name="'70s 295">{{cite book |title= How We Got Here: The '70s|last= Frum|first= David|author-link= David Frum|year= 2000|publisher= Basic Books|location= New York, New York|isbn= 0-465-04195-7|pages= 295–98|url= https://books.google.com/books?id=hNsSttYnmxsC&pg=PA296 }}</ref> In the following three months, this move strengthened its economy. Simultaneously, the dollar dropped 7.5% against the Deutsche Mark.<ref name="'70s 295"/> Other nations began to demand redemption of their dollars for gold. [[Switzerland]] redeemed $50 million in July.<ref name="'70s 295"/> France acquired $191 million in gold.<ref name="'70s 295"/> On August 5, 1971, the [[United States Congress]] released a report recommending [[devaluation]] of the dollar, in an effort to protect the dollar against "foreign price-gougers".<ref name="'70s 295"/> Also in August French President [[Georges Pompidou]] sent a battle ship to New York City to remove France's gold deposits.<ref name="h560">{{cite book | editor-last1=Lamoreaux | editor-first1=Naomi R. | editor-last2=Shapiro | editor-first2=Ian | title=The Bretton Woods Agreements | publisher=Yale University Press | series=Basic Documents in World Politics | year=2019 | chapter = Chapter 6: A "Barbarous Relic" : The French, Gold, and the Demise of Bretton Woods| last1=Graetz | first1= Michael J.| last2=Briffault| first2=Olivia| isbn=978-0-300-23679-8 | url=https://books.google.com/books?id=qI-fDwAAQBAJ&pg=PA130 | access-date=2024-06-23 | page=130-132}}</ref> On August 9, 1971, as the dollar dropped in value against European currencies, Switzerland left the Bretton Woods system.<ref name="'70s 295"/> The pressure began to intensify on the United States to leave Bretton Woods. On 11 August Britain requested $3 billion in gold be moved from Fort Knox to the Federal Reserve in New York.<ref name="h560"></ref> By 15 August Nixon would declare there were only 10,000 metric tons of gold remaining, or less than half of the reserves the US once held.<ref name="h560"></ref>
==
At the time, the U.S. also had an unemployment rate of 6.1% (August 1971)<ref name=usunemploy>{{cite web |url=http://www.google.com/publicdata/explore?ds=z1ebjpgk2654c1_&ctype=l&strail=false&bcs=d&nselm=h&met_y=unemployment_rate&fdim_y=seasonality:S&scale_y=lin&ind_y=false&rdim=country&idim=country:US&ifdim=country&ind=false |title=Unemployment in the U.S. | work = Google Public Data Explorer |access-date= 2017-03-18}}</ref><ref group=notes>To compare over the period from 1950–2013 from the same Bureau of Statistics Unemployment rate data, in the United States unemployment rates rose to highs of 10.8% in November 1982 and 10% in October 2009; and dropped to lows of 2.5% in May, 1953; 3.9% in September, 2000; 4.4% in May, 2007; 5% in March 1989; 7.7% in July 1992; 7.9% in October, 1949; 7.4% in August 1958.</ref> and an inflation rate of 5.84% (1971).<ref name= "inflationdata_1950_2013">{{cite web
|title=Historical Inflation Rate |first= Tim |last=McMahon |date= 3 April 2013 |url= http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_current |page=3}}</ref> To combat these problems, Nixon consulted [[Federal Reserve]] chairman [[Arthur Burns]], incoming [[Treasury Secretary]] [[John Connally]], and [[Paul Volcker]], then Undersecretary for International Monetary Affairs and future Federal Reserve Chairman.
On the afternoon of Friday, August 13, 1971,
▲On the afternoon of Friday, August 13, 1971, these officials along with twelve other high-ranking White House and Treasury advisors met secretly with Nixon at [[Camp David]]. There was great debate about what Nixon should do, but ultimately Nixon, relying heavily on the advice of the self-confident Connally, decided to break up Bretton Woods by announcing the following actions on August 15:<ref name="The Nixon Shock Heard 'Round the World">{{cite news|last=Lehrman|first=Lewis|title=The Nixon Shock Heard 'Round the World|url= https://www.wsj.com/articles/SB10001424053111904007304576494073418802358|work=Wall Street Journal|date=August 15, 2011|access-date=26 March 2013}}</ref><ref>{{cite web|last=Kollen Ghizoni|first=Sandra|title=Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls|url= https://www.federalreservehistory.org/essays/gold-convertibility-ends |work=Federal Reserve History|access-date=2 Dec 2021}}</ref><ref>Richard Nixon, "[https://www.presidency.ucsb.edu/documents/address-the-nation-outlining-new-economic-policy-the-challenge-peace Address to the Nation Outlining a New Economic Policy: 'The Challenge of Peace.']" (August 15, 1971)</ref>
# Nixon directed [[United States Secretary of the Treasury|Treasury Secretary]] [[John Connally|Connally]] to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the [[gold window]] to be closed such that foreign governments could no longer exchange their dollars for gold.
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Speaking on television on Sunday, August 15, when American financial markets were closed, Nixon said the following:
{{
==Impact and aftermath==
The American public believed the government was rescuing them from [[price gouging|price gougers]] and from a foreign-caused exchange crisis.<ref>Hetzel, Robert L. (2008), p. 84</ref><ref name= yergin&stanislaw>{{cite book|last1= Yergin|first1=Daniel|title=The Commanding Heights: The Battle between Government and the Marketplace that Is Remaking the Modern World|year=2002|publisher= Simon & Schuster|location=New York|isbn=0-68482975-4|author-link1= Daniel Yergin|last2=Stanislaw|first2=Joseph|author-link2=Joseph Stanislaw|url=https://archive.org/details/commandingheight00yerg_0}} cited in {{cite web|last1=Yergin|first1=Daniel|last2=Stanislaw |first2= Joseph | title =Nixon, Price Controls, and the Gold Standard | work = Commanding Heights|publisher= PBS| year = 2003| url = https://www.pbs.org/wgbh/commandingheights/shared/minitextlo/ess_nixongold.html| access-date = November 23, 2012}}</ref> Politically, Nixon's actions were a great success. The [[Dow Jones Industrial Average|Dow]] rose 33 points the next day, its biggest daily gain ever at that point, and the ''New York Times'' editorial read, "We unhesitatingly applaud the boldness with which the President has moved."<ref name=Lowenstein/><ref>Nicky Marsh, ''Credit Culture: The Politics of Money in the American Novel of the 1970s'' (2000) pp. 52–53. </ref> By December 1971, the import surcharge was dropped as part of a general [[revaluation]] of the [[Group of Ten (economic)|Group of Ten]] (G-10) currencies, which under the [[Smithsonian Agreement]] were thereafter allowed 2.25% devaluations from the agreed exchange rate. In March 1973, the fixed exchange rate system became a [[floating exchange rate]] system.<ref name=garber>{{cite conference |url= https://www.nber.org/chapters/c6876.pdf |title=The Collapse of the Bretton Woods Fixed Exchange Rate System |last1=Garber |first1=Peter M.}} in {{harvnb|Bordo|Eichengreen|1993|pp=461–94}}</ref> The currency exchange rates no longer were governments' principal means of administering [[monetary policy]].▼
{{
The Nixon shock has been widely considered to be a political success, but an economic failure for bringing on the [[1973–1975 recession]], the [[stagflation]] of the 1970s, and the instability of floating currencies.{{citation needed|date=June 2022}}
===Political effect===
▲Politically, Nixon's actions were a great success. The American public believed the government was rescuing them from [[price gouging|price gougers]] and from a foreign-caused exchange crisis.<ref>Hetzel, Robert L. (2008), p. 84</ref><ref name= yergin&stanislaw>{{cite book|last1= Yergin|first1=Daniel|title=The Commanding Heights: The Battle between Government and the Marketplace that Is Remaking the Modern World|year=2002|publisher= Simon & Schuster|location=New York|isbn=0-68482975-4|author-link1= Daniel Yergin|last2=Stanislaw|first2=Joseph|author-link2=Joseph Stanislaw|url=https://archive.org/details/commandingheight00yerg_0}} cited in {{cite web|last1=Yergin|first1=Daniel|last2=Stanislaw |first2= Joseph | title =Nixon, Price Controls, and the Gold Standard | work = Commanding Heights|publisher= PBS| year = 2003| url = https://www.pbs.org/wgbh/commandingheights/shared/minitextlo/ess_nixongold.html| access-date = November 23, 2012}}</ref>
▲{{refimprove|section|rationale=At the risk of being [[WP:NOR|original research]], this section needs more citations to support its claims, especially its tie-in to the Great Recession at the end of the section.|date=December 2021}}
The Nixon shock has been widely considered to be a political success, but an economic failure for bringing on the [[1973–1975 recession]], the [[stagflation]] of the 1970s, and the instability of floating currencies.{{cn|date=June 2022}} The dollar plunged by a third during the 1970s. According to the ''World Trade Review''{{'}}s report "The Nixon Shock After Forty Years: The Import Surcharge Revisited", Douglas Irwin reports that for several months, U.S officials could not get other countries to agree to a formal revaluation of their currencies.{{citation needed|date=December 2021}} The [[German Mark]] appreciated significantly after it was allowed to float in May 1971. Further, the Nixon shock unleashed enormous speculation against the dollar. It forced Japan's central bank to intervene significantly in the [[foreign exchange market]] to prevent the [[Japanese yen|yen]] from increasing in value. Within two days August 16–17, 1971, Japan's central bank had to buy $1.3 billion to support the dollar and keep the yen at the old rate of ¥360 to the dollar. Japan's foreign exchange reserves rapidly increased: $2.7 billion (30%) a week later and $4 billion the following week. Still, this large-scale intervention by Japan's central bank could not prevent the depreciation of US dollar against the yen. France also was willing to allow the dollar to depreciate against the [[French franc |franc]], but not allow the franc to appreciate against gold. Even much later, in 2011, [[Paul Volcker]] expressed regret over the abandonment of Bretton Woods: "Nobody's in charge," Volcker said. "The Europeans couldn't live with the uncertainty and made their own currency and now that's in trouble."<ref name=Lowenstein/>▼
===Economic effect and legacy===
By December 1971, the import surcharge was dropped as part of a general [[revaluation]] of the [[Group of Ten (economic)|Group of Ten]] (G-10) currencies, which under the [[Smithsonian Agreement]] were thereafter allowed 2.25% devaluations from the agreed exchange rate. According to Douglas Irwin in ''World Trade Review''{{'}}s report "The Nixon Shock After Forty Years: The Import Surcharge Revisited", for several months, U.S officials could not get other countries to agree to a formal revaluation of their currencies.{{citation needed|date=December 2021}}
In March 1973, the fixed exchange rate system became a [[floating exchange rate]] system.<ref name=garber>{{cite conference |url= https://www.nber.org/chapters/c6876.pdf |title=The Collapse of the Bretton Woods Fixed Exchange Rate System |last1=Garber |first1=Peter M.}} in {{harvnb|Bordo|Eichengreen|1993|pp=461–94}}</ref> The currency exchange rates no longer were governments' principal means of administering [[monetary policy]].
▲
Even much later, in 2011, [[Paul Volcker]] expressed regret over the abandonment of Bretton Woods: "Nobody's in charge," Volcker said. "The Europeans couldn't live with the uncertainty and made their own currency and now that's in trouble."<ref name=Lowenstein/>
==See also==
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{{Federal Reserve System}}
[[Category:Cold War history of the United States]]▼
[[Category:1971 in American politics]]
[[Category:August 1971 events in the United States]]
▲[[Category:Cold War history of the United States]]
[[Category:Economic history of the United States]]
[[Category:Gold standard]]
[[Category:Presidency of Richard Nixon]]
▲[[Category:1971 in economics]]
[[Category:United States economic policy]]
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