- The financial world is remembering the ‘Nixon Shock’ that began 50 years ago yesterday
- The Nixon Shock was the result of a series of measures taken by President Richard Nixon in 1971 to ease unemployment and reduce inflation
- Nixon took the U.S. out of the Bretton Woods agreement, meaning that the value of the U.S. dollar was no longer tied to the value of gold
50 years ago yesterday, president Richard Nixon made a series of announcements that all but severed the tie between the value of the U.S. dollar and the price of gold. The ‘Nixon Shock’ meant that, having been tied to the value of gold since 1944, the dollar would now only be backed by confidence in the U.S. government and Federal Reserve. Nixon ended fixed exchange rates and ushered in what we now know as the fiat system, where money can be printed by the trillion with nothing to back it. But what drove him to make that decision fifty years ago, and what are the ramifications today?
U.S. Dumped Dollar-Gold Peg
In 1971 America was in a parlous state. Unemployment was at 6.1%, inflation was at 5.84%, and foreign nations, worried by the drop in the value of the dollar, were redeeming the gold that was stored on their behalf by America. European countries were leaving the Bretton-Woods system that had been in place since 1944, which was the system that tied the value of fiat currencies to the gold price.
The pressure on Nixon began to grow, and in mid-August 1971 he met with the Treasury to discuss the options open to him. On August 15th it was decided that America would follow other countries in leaving the Bretton-Woods system, essentially killing it dead, in a move that Nixon announced on television would “stabilize the dollar”.
Nixon Shock Still Debated Today
The immediate impact of the Nixon Shock was positive, with markets putting in some of their biggest ever one-day gains and the slide in the value of the dollar halting. However, debates over the longer term impact of the Nixon Shock continue to this day, with some arguing that it had an impact on the monetary policy that ultimately contributed to the 2007-08 financial crash.
The impact of the Nixon Shock can also be seen in the ‘money printer go brrrr’ meme that has inspired many to look to an intentionally scarce asset such as Bitcoin over a limitless dollar as a true store of value. The coronavirus pandemic has contributed massively to this sentiment, with $5.2 trillion in fiscal stimulus pumped into the economy on the back of it.
This would simply not have been possible had the Nixon Shock not taken place, and whether this is ultimately a good or bad thing is something that will likely be debated for another 50 years.