Why Richard Nixon torpedoed the global monetary system
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Why did the United States suspend the dollar‑gold convertibility in 1971?
In 1955, for example, the U.S. had 165% more gold than it needed to redeem all the dollars outside the U.S. But by 1970, 1971, it only had 25%. There was a fear in the U.S., and actually in other countries too, that they would come to the U.S., say, here are dollars, we want gold, and the U.S. wouldn't be able to redeem it.
Germany alone had more dollars than there was gold in Fort Knox.
So, drumroll. I have directed Secretary Connolly to suspend temporarily the convertibility of the dollar into gold.
Today on The Story of Money...
What happens when the President of the United States of America makes a shocking unilateral decision to torpedo the entire post-war global economic order? And nope, this time we're not talking about Donald Trump.
Let us take you back instead to 9pm East Coast time on the 15th of August 1971. US President Richard Milhouse Nixon is making a surprise appearance on the major TV networks, elbowing aside a scheduled viewing of Bonanza. That was then the biggest TV show in America at the time.
American audiences had actually grown pretty used to these kind of unscheduled addresses. Nixon typically used them to explain his latest moves in Vietnam, for example. But this time, he had a very, very different subject on his mind.
The time has come for a new economic policy for the United States. Its targets are unemployment, inflation and international speculation.
Unemployment and inflation are big concerns for American voters. These are the early days of 1970s stagflation and both are on the rise.
So Nixon lays out a radical set of new measures to tackle this stagflationary problem. That's when inflation is really high and growth is stagnant. And these measures included investment subsidies, wage controls, price controls, almost $5 billion worth of spending cuts, which was quite a big deal back then.
So, drumroll, then he turns to the international speculation bit of his address.
In recent weeks, the speculators have been waging an all-out war on the American dollar.
So, unknown to his audience that Sunday evening, or indeed, frankly, most of his own government, at the end of his address, Nixon is about to fire that torpedo that we mentioned.
I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connolly to suspend temporarily the convertibility of the dollar into gold or other reserve assets.
Now, the dollar's value is tied to gold and every other major currency is tied to the dollar. So by cutting that link, Nixon is threatening to set adrift not only his own currency, but all of his allies' currencies as well in a chain reaction.
This announcement would become known as the Nixon shock. In a single, seemingly innocuous sentence, whether he realized it or not, the US president had just upended the entire post-war global monetary system that underpinned a quarter century of rapid economic growth.
And the thing to stress is until that afternoon, nobody knew it was coming, apart from Nixon and a tiny band of his very closest political allies who just spent the weekend together holed up in a secret meeting in a forest retreat in Maryland.
So how did it all come about? How did it go down with America's allies? What would the consequences be, not least for the US dollar?
And these are questions that keep reverberating through history. And we're going to be talking about this now in the story of money from the Financial Times with me, Gillian Tett.
And me, Robin Wigglesworth.
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So in today's episode, we'll be combining high finance with international monetary policy and the sometimes grubby inner workings of the Nixon administration.
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Chapters
5 chapters
1
Why did the United States suspend the dollar‑gold convertibility in 1971?
0:00–6:22
2
How did the 1971 TV address change the rules of the Bretton Woods system?
6:22–14:28
3
What was the role of the dollar as the anchor of the post‑war global monetary order?
14:28–29:07
4
How did the Triffin dilemma expose the structural weakness of Bretton Woods?
29:07–37:25
5
Who were the “international speculators” and how did Eurodollars fuel the crisis?
37:25–40:36
Speakers
3 identifiedMore from The Story of Money
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