Nixon shuts the gold window: the weekend the dollar cut loose
On Friday, August 13, 1971, fifteen men filed into the presidential retreat at Camp David and stopped answering their phones. The secrecy mattered: if the wrong ear heard what was being planned for Sunday night, every gold-holding central bank in the world would be on the line to Fort Knox by Monday morning.
The problem had been building for years, but it crested that summer with unusual speed. The Bretton Woods system, assembled in 1944, had pegged every major currency to the dollar at fixed rates, and pegged the dollar to gold at $35 an ounce — a promise that the United States government would exchange gold for dollars at that price to any central bank that came knocking. For twenty-five years it held.
By August 1971, non-U.S. central banks held $14 billion in U.S. dollars while America possessed only $13.2 billion in gold — with just $3.2 billion legally available for foreign redemptions (Wikipedia). The gap was no longer theoretical. In May, West Germany walked away from the Bretton Woods peg. Switzerland followed in August. On August 11, the British ambassador requested that $3 billion in gold be transferred from Fort Knox to New York — a polite way of announcing Britain’s intention to redeem (Wikipedia). France had already sent a ship.
The fifteen men at Camp David included Federal Reserve Chairman Arthur Burns, Treasury Secretary John Connally, and Undersecretary of the Treasury Paul Volcker — who understood the international monetary system, by his own account, “down to the plumbing.” Connally, a Texas Democrat turned Nixon loyalist, was the decisive voice: willing to sever the gold link without particular anxiety about the diplomatic fallout, and immune to the objections of the internationalists in the room. Burns worried. Volcker worried. Connally prevailed (Yale SOM).
On Sunday evening, with global currency markets closed for the weekend, Nixon spoke to the nation on television. The announcement had three parts: the gold window was shut immediately; wages and prices would be frozen for ninety days; and a 10 percent surcharge would land on all imports (Federal Reserve History). He called it a “New Economic Policy.”
The markets did not panic. The Dow Jones Industrial Average surged 33 points on August 16 — its largest single-day gain to that point. Japan’s central bank bought $1.3 billion in those first two days alone, scrambling to keep the yen from appreciating against a dollar that was suddenly untethered (Wikipedia). The world had just been told the dollar’s gold promise was void, and traders cheered.
In December 1971, finance ministers met at the Smithsonian Institution in Washington and tried to patch together a new set of fixed rates. Nixon called it “the most significant monetary agreement in the history of the world.” The claim aged poorly: the Smithsonian Agreement lasted fourteen months. By early 1973, the major currencies were floating — values set by market supply and demand for the first time in thirty years. The IMF ratified floating exchange rates in 1976 and called it a system.
The gold window has never reopened. The dollar, freed from any obligation to sit still at $35 an ounce, has held its place at the center of global finance anyway — not because it’s backed by anything, but because the world’s trade and debt are denominated in it, and no one has built a credible replacement.
Sources
- Nixon Ends Convertibility of U.S. Dollars to Gold — Federal Reserve History — Camp David timeline, advisers present, the three policy announcements, domestic economic context.
- Nixon shock — Wikipedia — gold reserve statistics, British and French redemption demands, Dow surge, Japan’s dollar purchases.
- How the ‘Nixon Shock’ Remade the World Economy — Yale SOM — Connally as decisive voice, Volcker’s role, longer-term monetary effects.