Why was the gold-backing of $USD discontinued during the Nixon presidency?
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At that time international trade could still exchange dollars for gold, even though the tie in the domestic economy had ended. That meant there were effectively two prices for gold in dollars. One price was the local economy price, the other price was the international price. Because of inflation the local economy price was higher than the international trade price. That meant people wanted to buy gold at the fixed exchange price and the US gold reserves were declining.
Nixon ended the ability to trade dollars for gold for everyone.
Gold standard did not work with globalization. It promoted countries to horde gold and not engage in importing goods.
The Bretton Woods system was an agreement in 1944 between the US, Canada, Western Europe, Australia and Japan. The goal was to maintain the exchange rate between the different countries by tying the currency to gold in value.
As the biggest economy, the US kind of lead the show and this created problems for other countries. To keep with the Bretton Woods and keep the exchange rate, other countries would have to devaluate their own currency and in the 70s they were not ready to do so.
In May 1971, Germany left the agreement, their economy grew and the US Dollar to German Mark exchange rate dropped by 7.5% in 3 months. A couple of month later, Switzerland left the agreement too. Countries were also exchanging USD to gold, dropping the value of the USD even more. The US economy wasn’t in a good shape at the time either with high inflation and unemployment rate. Nixon eventually broke the agreement.
It was way too expensive. The problem with a gold backed currency is that you need a huge amount of gold. That means some place to store it. The Willy Horton rule says that place is now super desirable to rob, so you have to spend a lot of money guarding it. All this cost, all this work, and 0 return – it’s just not a good thing to do.
Oh yes, and gold is actually valuable, for electrical circuits and jewelry and other decorative items. Having the government horde it means that there is less for the industries that need gold to make their products.
Fiat currencies have different set of advantages (and disadvantages) than commodities back currencies.
Most people point the finger at Nixon but the reality is in March 19, 1968, President Johnson signed a bill eliminating the “gold cover” (i.e., the reserve backing by gold) for Federal Reserve notes. Prior to the removal of the gold cover, each Federal Reserve Bank had been required to hold a gold certificate reserve of not less than 25 percent against its Federal Reserve note liability. (The gold certificates represented gold actually held by the United States Treasury.) When the gold cover requirement was removed in March of 1968, the ratio of the gold stock of the U.S. to the total Federal Reserve note liability stood at 25.0084
After LBJ’s changes, politicians quickly realized that they no longer had to increase taxes (unpopular among the voters) in order to increase spending, especially vote-buying spending on their favorite special interest groups. The government could borrow to fund ever increasing deficits, secure in the knowledge that their servants at the Federal Reserve, freed by LBJ from the weight of any necessary gold reserve to back their Federal Reserve notes, would simply create the money out of thin air and buy the debt obligations not absorbed by the credit market (the definition of quantitative easing). Moreover, banks, as a result of substantially reduced reserve requirements, courtesy of the Federal Reserve, could easily create even more money simply by making new loans.
(Side Note: there ARE times when it’s good for you in trade to be able to manipulate the supply of currency as the medium of trade; although it can get you labeled as an unfair trade partner and/or a currency manipulator. On a system built on debt holdings, not being able to get people to lend to you is a serious issue).
Nixon and Kissinger are some of those aforementioned politicians and knew that they could effectively “game the system” and ensure economic hegemony by driving in the coffin nail and securing some level of economic security over rising fears that other countries could precipitate a run on the US Dollar.
Under the Bretton Woods agreement of 1944 the U.S. dollar was the only national currency directly backed by gold. Other currencies were valued against the dollar, which could be exchanged through the U.S. government’s “gold window” for a fixed amount of gold. Since this was the case the gold backed dollar couldn’t keep up with the “Greatest Generation” boom and economic growth foreign and abroad.
TL;DR: Part Domestic Political move started before Nixon, Part Nixon Kissinger plan to ensure US economic global dominance.
A few reasons. For starters, there just isn’t enough gold in circulation with which to benchmark the global economy. Any solution to this, like shifting (i.e; increasing) the fixed price of gold to adjust monetary supply makes a total mockery of the gold standard to begin with.
Also, the gold standard effectively punishes imports. If you have more imports than exports, like has been the case in the US for many decades, it is basically impossible to hold enough gold to balance the sheets. Some would argue this is a good thing since it puts huge brakes on globalization and forces a balance between imports and exports, but that just isn’t possible to maintain in every country. It is also questionable at best to enshrine such balance as the premier principle of international monetary policy
There are *big* arguments about how best to run money, and nearly nobody – including economics textbooks, and certainly including me – can be trusted to give you an objective right answer. Maybe there isn’t a right answer. But fixing the price of money relative to one type of physical object – which seems really obvious – has had some unwanted side effects on the action of economies. This is a dangerous field to have a solid and unchangeable opinion in, especially for an amateur, and anyone trying to sell you something based on the idea that it’s all really simple when you get down to it may well be trying to rob you.
Basically the US has printed too many dollars and other countries were getting wise to it.
There was a sort bank run going on and countries wanted to exchange their gold for dollars. France sent a war ship to the US and asked the Americans to load France gold onto it.
If Nixon had continued to allowed exchange the US would have lost all it’s gold.
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