(John Zadeh’s post from THE DISCOVERY ALERT USA on 13 April 2025.)
The Nixon Shock Explained: On August 15, 1971, President Richard Nixon unilaterally ended dollar convertibility to gold, a decision that would fundamentally transform the global economic landscape.
This dramatic move came as US gold reserves had
declined precipitously from approximately 20,000 tons to just 8,333 tons. The
depletion occurred because foreign nations, particularly France under President
Charles de Gaulle, were increasingly redeeming dollars for physical gold as the
US ran persistent trade and budget deficits.
Nixon's decision, made during a secret meeting at Camp David with key economic advisors, was essentially a choice to preserve America's remaining gold reserves rather than face an inevitable default on gold-for-dollar obligations. Treasury Secretary John Connally famously remarked during this period that "the dollar is our currency, but it's your problem," highlighting the unilateral nature of this momentous economic shift.
The Historical Path to 1971: The foundation for the Nixon Shock was laid decades
earlier. In 1933, President Franklin D. Roosevelt issued Executive Order 6102,
which effectively confiscated gold from US citizens, making private ownership
of significant quantities of gold illegal. This represented the first major
step in separating Americans from gold-backed money.
In 1944, the Bretton Woods system established the
dollar as the world reserve currency backed by gold at a fixed rate of $35 per
ounce. While other currencies could fluctuate, the dollar maintained this gold
peg, creating an international monetary framework that would last for nearly
three decades.
Between 1961 and 1968, the London Gold Pool was
formed by eight central banks working in concert to artificially maintain the
$35/oz gold price. This coordination required massive intervention, with
central banks selling enormous quantities of their gold reserves whenever the
market price threatened to rise above the fixed rate.
By 1968, a surge in gold demand—driven by concerns
about dollar devaluation—overwhelmed the Gold Pool despite the sale of over
3,000 tons of bullion. This collapse set the stage for Nixon's eventual
abandonment of gold convertibility three years later.
How Did the Gold Standard Removal Transform the Economy?
Pre-1971 Economic Indicators: Before the Nixon Shock, the American economy
displayed remarkable stability in several key metrics. Worker compensation and
productivity rose in lockstep, creating broad-based prosperity. A single income
was typically sufficient for a middle-class lifestyle, including home
ownership.
Wages kept pace with economic growth, allowing
workers to benefit directly from increases in productive capacity. The
expanding middle class represented one of the most significant economic
developments of the post-WWII era, with homeownership reaching record levels.
Perhaps most importantly, income gains were broadly
shared across economic classes. The gap between executive and worker
compensation remained relatively modest, with CEOs earning approximately 20
times the average worker's salary—compared to over 350 times today.
Post-1971 Economic Shifts: The post-gold standard era has witnessed dramatic
economic transformations. Federal debt increased from $398 billion to over $36
trillion, an increase of more than 9,000%. This unprecedented growth in
national debt was only possible under a fiat currency system without the
discipline imposed by gold backing.
