How Nixon and FDR Used “Crises” to Destroy the Dollar’s Links to Gold
Since August 15, 1971, the US dollar has been completely severed from gold. President Richard Nixon suspended the most important component of the Bretton Woods system, which had been in effect since the end of World War II. Nixon announced that the US would no longer redeem dollars for gold for the last remaining entities that could: foreign governments. Gold redemption had been made illegal for everybody else, so this action finally ended any semblance of a gold standard for the US dollar.
In Crisis and Leviathan, Robert Higgs showed how in the twentieth century the US government grew in size and scope primarily during crisis periods like wars or economic depressions. The powers gained during those periods were often advertised as “temporary,” but history shows that governments rarely relinquish powers. This “ratchet effect” applies to the way Nixon “temporarily” suspended gold redemption in 1971—the resulting regime of unbacked fiat dollars remains in effect today.
What Was the Bretton Woods System?
The Bretton Woods system was designed by the Allied nations, led by the United States, near the end of World War II as a postwar international monetary order. The US dollar would become the world’s reserve currency, which foreign governments could redeem for gold, even though US citizens could not. This prohibition was not new for US citizens, since Franklin D. Roosevelt outlawed private ownership of gold coins and bullion in 1933.
To get foreign governments to join the agreement, the US promised to redeem dollars for gold at $35 per ounce, which limited the extent to which the supply of dollars could be expanded. International trade was slow to restart after World War II, which meant that the Bretton Woods system of gold exchange was not fully tested until the late 1950s.1 Yet, even by this time, US inflation meant that Japan and countries in Western Europe were holding a reserve currency that was falling in value, especially relative to the promised $35-per-ounce price of gold.
The US could only use diplomatic pressure to slow the foreign governments’ requests for gold redemption. Even so, the US lost about 55 percent of its stock of gold from the early 1950s to the end of the Bretton Woods system in 1971.
In a last-ditch effort to maintain the Bretton Woods system in 1968, the US tried to implement a “two-tier gold market” such that central banks around the world would participate in one market that would seek to keep the $35-per-ounce dollar-to-gold ratio, and would not buy or sell in the other tier: the private, free gold market.
This, of course, quickly fell apart. By 1971, President Nixon could not contain the effects of the monetary inflation used to pay for the Vietnam War and Lyndon B. Johnson’s Great Society programs (including Nixon’s own expansions). Amid a host of desperate interventions such as new tariffs and wage and price controls, Nixon also “temporarily” suspended gold convertibility. He sought to “protect the position of the American dollar as a pillar of monetary stability around the world.”
The dollar was completely severed from any commodity backing, making it a purely fiat money. The Fed
Article from Mises Wire