The Volcker shock
Federal Reserve Chairman Paul Volcker raised short-term rates to nearly 20 percent to break inflation. The fiat dollar faced its first real test: could it hold value without gold backing, when inflation had already reached 14.8 percent? Yes, but only at the cost of two recessions and double-digit unemployment. The decision defined modern central banking.
The Volcker shock is the reason the fiat dollar survived as a credible currency. Without it, 1970s inflation would likely have produced permanent expectation of double-digit price increases, and the dollar's reserve-currency status would not have survived the decade. The political cost Volcker absorbed is rarely acknowledged.
06 · Fiat & Petrodollar
On August 15, 1971, Nixon ended the dollar's convertibility into gold. Every major currency in the world became pure fiat — backed by nothing but the taxing power and political stability of its issuer. Two years later, a US-Saudi agreement priced oil in dollars, giving the dollar one more thing to stand on: the global energy trade.
Read the full era →