Here at Landmark Capital, we are all about knowing the facts. It is indeed a fact that President Richard Nixon resigned his presidency. It also happens to be a fact that Nixon was responsible for the cancellation of direct convertibility of the United States dollar to gold. We would like to sit down with you and give you a little gold history.
Bretton Woods System
In 1944 in Bretton Woods, New Hampshire, representatives from 44 nations met to develop a new international monetary system that came to be known as the Bretton Woods system. Conference members had hoped that this new system would ensure exchange rate stability, prevent competitive devaluations, and promote economic growth.
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 of $35 per ounce, which was redeemable by the U.S. government. Thus, the United States was committed to backing every dollar overseas with gold.
Other currencies were fixed to the dollar, and the dollar was pegged to gold.
Camp David
About 13 years after the Bretton Woods System was in full swing, on the afternoon of Friday, August 13, 1971, 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 decided to break up Bretton Woods by suspending the convertibility of the dollar into gold. He froze wages and prices for 90 days to combat potential inflationary effects. He also imposed an import surcharge of 10 percent, to prevent a run on the dollar, stabilize the US economy, and decrease US unemployment and inflation rates.
The American public felt the government was rescuing them from price gougers and from a foreign-caused exchange crisis. Politically, Nixon’s actions were a great success. The Dow rose 33 points the next day, its biggest daily gain ever at that point.
By December 1971, the import surcharge was dropped as part of a general revaluation of the Group of Ten (G10) 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. The currency exchange rates no longer were governments’ principal means of administering monetary policy.
Results of the Switch
The Nixon Shock has been widely considered to be a political success, but an economic mixed bag in bringing on the stagflation of the 1970s and leading to the instability of floating currencies. The dollar plunged by a third during the ’70s, and in 1997 several Asian and Latin countries faced currency crises.
Stay Tuned
If you found this story interesting, we would ask you to stay tuned for our future posts. We’ve got a series of historic stories on gold. Otherwise, you can learn how to diversify your portfolio by calling 877-448-2646 or visiting our Contact Us page.