The Nixon Shock, in plain language
On a Sunday night in August 1971, Richard Nixon told a television audience that dollars would no longer be redeemable for gold. Every major currency in the world became pure fiat within hours.
On the evening of Sunday, August 15, 1971, Richard Nixon gave a televised address from the Oval Office. He talked for about twenty minutes, interrupted only once by a phone call. Halfway through, he announced that the United States was 'closing the gold window'. Most Americans watching had no idea what he had just said. It was the unravelling of the Bretton Woods system built 27 years earlier.
What Bretton Woods was
Since 1944, the international monetary system had been built around the US dollar. Any foreign central bank holding dollars could exchange them at the US Treasury for gold at a fixed rate of 35 dollars per ounce. Other currencies were pegged to the dollar. The dollar was pegged to gold. It was called the Bretton Woods system, after the New Hampshire resort where 44 nations negotiated it at the end of World War II.
By 1971, the math had stopped working. The United States had been running persistent trade and fiscal deficits, partly because of the Vietnam War and Great Society spending. Foreign holdings of dollars had ballooned far beyond US gold reserves. A run on American gold was a realistic possibility.
What Nixon actually did
He suspended dollar-gold convertibility 'temporarily'. He imposed a 90-day wage and price freeze. He slapped a 10 percent tariff on imports. The overall package was designed to buy political time and to force trading partners to renegotiate currency pegs on American terms.
The temporary suspension turned out to be permanent. The Smithsonian Agreement in December 1971 tried to patch the system with slightly adjusted pegs. It collapsed within fifteen months. By March 1973, major currencies were floating against each other with no gold backing anywhere. That is the system we still live in.
The consequences nobody budgeted for
Within two years, oil prices quadrupled. US inflation, already rising, accelerated into the 1970s stagflation. The dollar lost about a third of its real value between 1971 and 1979. It took Paul Volcker's extreme interest rate regime at the end of the decade to restore price stability.
Most economists today argue that the Bretton Woods system had to end, and probably sooner rather than later. But the transition was chaotic because no one had planned for it. The subsequent 55 years of pure fiat currency, including everything from Volcker to quantitative easing to CBDCs, is the world that August 1971 started. Every currency ever issued has followed the same debasement pattern.