Fifty years ago, President Nixon turned the dollar into a fiat currency, overturning the basic monetary arrangements of the postwar era
By Jeffrey E. Garten. Mr. Garten is dean emeritus of the Yale School of Management. He has written a book called “Three Days at Camp David: How a Secret Meeting in 1971 Transformed the Global Economy.” Excerpts:
"Fifty years ago next month, at a secret weekend meeting at Camp David, President Richard Nixon and his top economic advisors decided to take the U.S. off the gold standard. The dramatic move, announced by the president upon his return to the White House on August 15, 1971, suspended the most fundamental rules of the international monetary system, affecting the prices of all products, commodities and services in world commerce."
"Nixon’s decision overturned arrangements created by the U.S. and its wartime allies in 1944 at Bretton Woods, New Hampshire, where Washington had agreed to exchange dollars for gold at a rate of $35 per ounce. Making the dollar convertible into gold, and pegging every other currency to dollars at a fixed rate, was meant to inject stability into international commerce. The hope was to avoid the sort of competitive currency depreciations and rampant tariff increases that had worsened the Great Depression in the 1930s and helped to precipitate a world war.
The dollar-gold link was credible because Uncle Sam owned most of the world’s gold after the war—and because American leaders publicly stressed their commitment to the agreement."
"Confidence in its solidity fueled the phenomenal recovery of Japan and Western Europe from wartime devastation and played a big part in the American economic boom of the 1950s and 60s."
"So why did Nixon cast aside this system? In the late 1960s, inflation began to accelerate, and holders of dollars feared the erosion of the currency’s purchasing power. At the same time, U.S. trade balances were deteriorating, thanks to fierce competition in manufactured goods from Japan and West Germany. Protectionist sentiment in the country was growing. The Nixon administration, congressional leaders and many CEOs believed that the link to gold overvalued the dollar, making U.S. imports too cheap and exports too expensive. They thought that severing the gold link would devalue the dollar in relation to other currencies and boost American trade.
Perhaps more important was the fact that the U.S. no longer had the gold supplies to convert all the world’s dollars. In 1955, U.S. gold reserves exceeded dollars held by foreign governments and central banks by 160%; by 1971, those reserves equaled just 25% of dollars held abroad."
"policy makers were deeply concerned that if too many countries requested gold for dollars, Washington would have to abruptly end its pledge of convertibility. Such a failure, it was feared, would not only undermine U.S. credibility in international finance but raise questions in the minds of allies about the durability of American military commitments under NATO and other treaties."
"The Camp David decisions opened the way for new arrangements, in which exchange rates were not fixed against one another and not backed by gold, but instead allowed to float up and down depending on market forces. Nothing tangible backed currencies—only domestic economic conditions and international trust in a country’s policies and institutions."
"In the years between 1945 and 1971, there were hardly any global banking crises. The era of floating exchange rates, by contrast, has produced many"
"floating exchange rates also had benefits. They could accommodate rapid changes in the global economy, such as gyrating oil prices or new competitive pressures from emerging markets. They allowed trade and capital flows to flourish, which helped to lower prices and expand consumer choices while dramatically reducing global poverty."
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