After Richard Nixon's emergency brake, money was no longer worth its weight in gold

14.10.2021 14:00

After Nixon’s emergency brake, money was no longer worth its weight in gold

USA – For centuries, the value of money was linked to that of a precious metal – usually gold or silver.

With his televised address on August 15, 1971, US President Richard Nixon shocked the global financial markets. Although he only wanted to close the gold window “temporarily”, the previous system of fixed exchange rates collapsed forever. © picture alliance / dpa

But 50 years ago the world experienced its “Nixon shock” completely unprepared.

Without consultation with other nations or decision-makers, US President Richard Nixon announced in a televised address on August 15, 1971 the end of the gold price link for the US dollar.

This also meant the collapse of the previous system of fixed exchange rates.

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From then on, money was only printed paper, the individual states could start the printing press and accumulate exorbitant debts.

United States of America has banned private gold ownership from its population since the 1930s

Bretton Woods in New Hampshire: In 1944 44 nations had committed themselves to the gold standard here, and US Treasury Secretary Fred Vinson also signed it.

Bretton Woods in New Hampshire: In 1944 44 nations had committed themselves to the gold standard here, and US Treasury Secretary Fred Vinson also signed it. © picture-alliance / dpa / UPI

Most states had already abandoned the gold standard of their currency after the First World War and especially after the Great Depression.

Only the United States, which had forbidden its people to own gold privately since the 1930s, still guaranteed a fixed exchange rate.

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During the Second World War, when the world trade champion Great Britain slipped just past insolvency several times, over 700 delegates from 44 countries met in Bretton Woods (New Hampshire) in 1944 to decide on a worldwide and crisis-proof currency system.

The rise of the dollar as an international anchor currency

President Franklin D. Roosevelt (1943) in front of Fort Knox: Here he had the American gold bunkered.

President Franklin D. Roosevelt (1943) in front of Fort Knox: Here he had the American gold bunkered. © picture alliance / AP

The Bretton Woods system stipulated that the US Federal Reserve (“Fed” for short) undertook to buy or sell an unlimited amount of gold at a fixed price: 35 US dollars for one troy ounce (31.104 grams) .

The currencies of other countries were integrated into a fixed exchange system for the US dollar and were thus also worth gold.

In return, the central banks of the other countries undertook to stabilize the exchange rates of their currencies within a range of one percent through financial policy measures and interventions in foreign exchange markets. To help indebted states, the World Bank and the International Monetary Fund were founded.

The Fed could afford that too. In 1948, Fort Knox, which is considered impregnable, was home to over 70 percent of the world’s gold reserves. They were worth considerably more than the US foreign debt. And the American economy, largely undamaged during the war, was booming. The dollar thus rose to become the world’s anchor currency.

In the 1950s, other countries caught up economically with the USA

Due to the expensive Vietnam War, the USA got more and more into debt.  The treasure was used up.

Due to the expensive Vietnam War, the USA got more and more into debt. The treasure was used up. © picture alliance / TopFoto

But the world economy caught up in the 1950s. In particular, the defeated countries of Germany and Japan in the war became powerful export nations through “economic miracles”.

The United States’ foreign trade deficit grew – because of expensive wars in Korea and Vietnam, the US dollar press ran at full speed, and inflation rose.

In 1966, foreign banks owned $ 14 billion, while the Fed only had $ 12 billion in gold reserves. The dollar began to smell, one no longer trusted it. French President Charles de Gaulle even sent the Navy to New York to collect the French gold. States prefer to invest in gold, yen or D-Mark themselves. In 1969 the federal government grudgingly had to accept a revaluation of the mark (from 4 to 3.66 per dollar).

Although the Bundesbank steadily lowered interest rates, investors still exchanged their dollars for D-Marks. As a result, the Brand cabinet decided in May 1971 to release the exchange rate, and the dollar plunged to 3.12 marks.

A speech that will shock the whole world

And so the President’s televised address on August 15, in which he should have admitted the greatest economic defeat in the United States, came about. While foreign currency watchdogs rubbed their eyes angrily, Richard Nixon achieved a media triumph among his compatriots, which should secure him re-election.

Initially, he put the blame on foreign speculators who want to damage the dollar. Therefore he will “temporarily” close the gold window. In order to stop inflation and the upheavals in his own country, he imposed a wage and price freeze for 90 days. He also ordered an import surcharge of 10 percent to encourage the purchase of American products. The Dow rose 33 points the following day, the biggest jump since World War II.

The debt ratio multiplied

After the value of the dollar was decoupled from gold, the printing presses started and debts were incurred all over the world.

After the value of the dollar was decoupled from gold, the printing presses started and debts were incurred all over the world. © imago images / UPI Photo

Other heads of state now had to watch as the value of their dollar reserves melted away with the stroke of a pen. Most countries released their currency, the value is determined in the foreign exchange market by supply and demand. The financial industry was now discovering new areas of business, and speculators were all the more victorious.

And because money no longer had an anchor by which to measure its value, the central banks of the individual countries started the money printing machines. The debt ratio – the value of liabilities measured against economic output – has multiplied in almost all countries since then. This is how financial crises arise time and again.

Always good for a surprise

Exactly one month earlier – on July 15, 1971 – President Nixon had already taken world politics by surprise with a televised address. Without warning, he announced a resumption of diplomatic relations with the People’s Republic of China. That was a complete realignment of US foreign policy.

It was not only in Taiwan that people were shocked. The most important ally in the Pacific region, Japan, now had serious doubts as to how sustainable the security promise still was under the protective umbrella of the nuclear power USA. For a long time there was diplomatic irritation between the two countries.

The term “Nixon shock” came about after the financial policy announcement. True to the motto “What is the madman planning now?” Nixon’s television appearances with ambassadors were from now on compulsory, which they followed anxiously.

Titelfoto: Montage: picture alliance/dpa, https://twitter.com/SatoshiLite/

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