Nixon Shock
The Nixon Shock refers to the economic policy announcements made by President Richard Nixon on August 15, 1971, most consequentially the suspension of the US dollar's convertibility to gold, which ended the Bretton Woods international monetary system and ushered in the era of floating exchange rates.
On the evening of Sunday, August 15, 1971, President Richard Nixon interrupted regular television programming to announce a package of emergency economic measures that would fundamentally alter the structure of the global monetary system. Speaking from Camp David after a secret weekend meeting with his top economic advisers, Nixon announced three major actions: a 90-day wage and price freeze to combat inflation, a 10% surcharge on imports, and — most consequentially — the suspension of the US dollar's convertibility to gold.
The decision to close the gold window, as it was known, reflected the unsustainable position into which the Bretton Woods system had evolved. The United States had been running persistent balance of payments deficits for years, funding both the Vietnam War and extensive domestic social programs while running a trade deficit that was eroding confidence in the dollar. Foreign central banks had accumulated enormous dollar holdings and were increasingly converting them to gold, draining US gold reserves from over $20 billion in 1960 to under $10 billion by 1971.
The immediate market reaction was dramatic. Stock markets rallied on the news, interpreting the wage and price freeze and the end of gold convertibility as decisive action against inflation. The Dow Jones Industrial Average rose 32 points on August 16, 1971, its largest single-day gain to that point. Foreign exchange markets responded differently: over the following two years, a series of international negotiations failed to re-establish a fixed exchange rate system, and by 1973 major currencies had moved to floating rates.
The long-term consequences of the Nixon Shock were profound. Without the anchor of gold convertibility, the US money supply could expand more freely, contributing to the inflation of the 1970s that eventually required the Volcker Shock to contain. Floating exchange rates introduced new forms of currency risk into international commerce and investment, giving birth to a vast foreign exchange derivatives market.
The Nixon Shock also fundamentally changed the nature of the US dollar. Rather than a claim on a fixed quantity of gold, the dollar became a fiat currency backed by the full faith and credit of the US government and by the dollar's role as the dominant medium for international trade — particularly the pricing of oil. This petrodollar system preserved the dollar's reserve currency status even after the end of gold convertibility, though it shifted the dollar's anchor from a commodity to geopolitical and economic relationships.