Richard Nixon spoke to the country on the night of August 15, 1971, and shut the gold window. Foreign governments could no longer trade their dollars in for gold. A system the United States had written into law in 1900 was finished in one speech.
The law of 1900
President McKinley signed the 1900 act that put the gold standard into statute, fixing the dollar at 25.8 grains of gold and ending a long political brawl over bimetallism. The Federal Reserve’s own history expresses that rate as $20.67 per ounce. Washington had already resumed convertibility in 1879, after suspending it in the Civil War, and for roughly 35 years currencies tied to gold were tied to one another as well. Money crossed borders with few obstacles.
World War I ended that. In 1914 the major powers suspended convertibility to pay for the fighting. Britain went back to gold in 1925 at its pre-war rate of $4.86 to the pound, a call championed by Winston Churchill, then chancellor. The pound was overvalued. British exports lost their edge, unemployment climbed, and the economist John Maynard Keynes took the policy apart in print. As the Depression deepened and investors rushed to turn currency into gold, reserves drained, and Britain gave up the standard in September 1931.
Roosevelt calls in the gold
The American break came in stages. In 1933 Franklin Roosevelt signed Executive Order 6102. Americans had to deliver gold coins, bars and gold certificates to the central bank and take cash at $20.67 per ounce. Firms that needed gold for work had to ask the Fed for bars.
The Gold Reserve Act, signed on January 30, 1934, finished the job. Ownership of all monetary gold passed to the Treasury, and holders were paid at $35 per ounce, which cut the dollar’s gold value to 59 percent of the 1900 level. The Treasury and banks were barred from redeeming dollars for gold. For the first time since the nineteenth century, the government decided when gold and paper changed hands, not the citizen. Roosevelt said the aim was “to stabilize domestic prices and to protect the foreign commerce against the adverse effect of depreciated foreign currencies.”
Bretton Woods and its slow leak
In 1944 delegates from 44 Allied countries gathered in the New Hampshire town of Bretton Woods. Their plan tied the dollar to gold at $35 an ounce and tied every other currency to the dollar. The arrangement lasted around 25 years, yet strain appeared early. On October 20, 1960, heavy buying in London lifted gold to $40 an ounce. Eight central banks answered by forming the London Gold Pool in November 1961. It worked for six years. Then sterling was devalued, another run followed, France pulled out, and by March 1968 the pool was gone.
The arithmetic was against Washington. American gold stocks peaked near $24.8 billion in 1949 and were down to about $10 billion in 1971. Meanwhile foreign central banks piled up dollars that they were entitled to convert.
Camp David, August 1971
From August 13 to 15, Nixon sat down at Camp David with fifteen advisers, Arthur Burns of the Fed, Treasury Secretary John Connally and Paul Volcker among them. Two days later came the address, titled “The Challenge of Peace.” Nixon named three tasks: “We must create more and better jobs; we must stop the rise in the cost of living; we must protect the dollar from the attacks of international money speculators.”
The package also froze wages and prices for 90 days, the first peacetime controls of that kind, and added a 10 percent import surcharge. Many abroad saw the speech as worrying unilateralism. The Group of Ten agreed fixed rates around a devalued dollar in the Smithsonian Agreement that December, but Bretton Woods did not last much longer.
Nixon described the suspension as temporary. The window stayed shut.
Sources
- Gold Reserve Act (Federal Reserve History)
- Nixon Ends Convertibility of U.S. Dollars to Gold and Announces Wage/Price Controls (Federal Reserve History)
- Nixon and the End of the Bretton Woods System, 1971-1973 (Office of the Historian, U.S. State Department)
- The Gold Standard: History, Mechanics, and Modern Relevance (BullionStar)
