Why was the gold-backing of $USD discontinued during the Nixon presidency?
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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.
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