40 years ago today, on August 15, 1971 President Nixon officially took the United States off the Gold Standard. In his speech, President Nixon claimed to have asked Treasury Secretary John Connally to defend the US Dollar by closing the convertibility of the dollar into gold. According to President Nixon this was done to protect the United States and the US Dollar against speculators and is remembered as “Nixon Shock”.
“In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy – and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the American dollar except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.”
As always, speculators or those who understand economics and recognize economic bubbles are blamed. People didn’t short the US Dollar or convert their US Dollar holdings into gold on unfounded rumors. The United States ran significant deficits that couldn’t be financed through direct taxation. The cost of the Vietnam war amongst other unfunded expenses would not be paid through direct taxation but through inflation.
Since Bretton Woods of 1944, the value of the US Dollar was tied at a fixed ratio of 35 dollars to one ounce of gold. Still claiming to be on the gold standard the United States had to redeem US Dollars for physical gold. In the months leading up to President Nixon’s famous speech, France correctly assumed that the United States devalued their paper currency . In an effort to continue fooling the world the United States made good on the promise to exchange physical gold at the 35:1 ratio. This temporarily restored some faith in the US Dollar but having inflated the paper dollars beyond the promised gold backing was a limited and unsustainable strategy. It was on August 15, 1971 that President Nixon officially took the US Dollar off the gold standard but nobody really knows the exact date that the US Dollar was no longer backed by gold at $35 per 1oz. according to the agreed Bretton Woods agreement. Fact remains that any currency speculator that shorted the dollar assuming that the US had more paper dollars in circulation than gold backing was correct. It wasn’t the currency speculators that devalued the dollar, it was runaway government spending.