Nixon Shock - Event

Event

At the time, the U.S. also had unemployment and inflation rates of 6.1% (Aug 1971) and 5.84% (1971), respectively. To combat these issues, President Nixon consulted the advice of Federal Reserve chairman Arthur Burns, incoming Treasury Secretary John Connally, and then undersecretary for international monetary affairs and future Fed Chairman Paul Volcker.

On the afternoon of Friday, Aug. 13, 1971, these officials and other high-ranking White House and Treasury advisors met secretly with Nixon at Camp David. There was great debate about what Nixon should do, but ultimately Nixon, relying heavily on the advice of the self-confident Connally, decided to break up Bretton Woods by suspending the convertibility of the dollar into gold, freezing wages and prices for 90 days to combat potential inflationary effects, and impose an import surcharge of 10 percent. "Connally brilliantly packaged the program not as America abandoning its commitment to the gold standard but as America taking charge. He turned the dollar's collapse, which could have appeared shameful, into a moment of hubris."

To prevent a run on the dollar, stabilize the economy, and decrease unemployment and inflation rates, on August 15, 1971, Nixon issued Executive Order 11615, pursuant to the Economic Stabilization Act of 1970, which imposed a 90-day maximum wage and price ceiling, a 10% import surcharge, and, most importantly, "closed the gold window", ending convertibility between U.S. dollars and gold.

Speaking on television on a Sunday before the markets opened, Nixon said the following:

The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world.

In the past 7 years, there has been an average of one international monetary crisis every year...

I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

Now, what is this action—which is very technical—what does it mean for you?

Let me lay to rest the bugaboo of what is called devaluation.

If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.

The effect of this action, in other words, will be to stabilize the dollar.

The American public felt the government was rescuing them from price gougers and from a foreign-caused exchange crisis. Politically, Nixon's actions were a massive success. The Dow rose 33 points the next day, its biggest daily gain ever at that point, and the New York Times editorial read, "We unhesitatingly applaud the boldness with which the President has moved."

By December 1971, the import surcharge was dropped, as part of a general revaluation of the Group of Ten (G-10) currencies, which under the Smithsonian Agreement were thereafter allowed 2.25% devaluations from the agreed exchange rate. In March 1973, the fixed exchange rate system became a floating exchange rate system. The currency exchange rates no longer were governments' principal means of administering monetary policy.