The Nixon Shock / by kevin murray

On August 15, 1971, President Nixon authorized: "Secretary Connally to suspend temporarily the convertibility of the American dollar." What this action did in effect was to unilaterally suspend the convertibility of the American dollar from gold which had been previously pegged at the fix rate of $35 per ounce, and in return this gold convertibility was replaced with the dollar being backed by the full faith and credit of the United States. Further, this action resulted in the repudiation of the Bretton Woods agreement of 1944 and thereby precluded foreign nations from being able to redeem their US Treasury assets into gold.  Consequently, this meant that the dollar had now become a fiat currency and that there was no longer anything holding back the American government from monetary fiscal restraint.


In Nixon's speech, he stated many things of which history shows he was wrong and Nixon probably knew he was wrong at the time he stated them.  For instance, Nixon claimed that the following would happen:

A.    "Halting Inflation"

B.     "American dollar as a pillar of monetary stability"

C.      "International money speculators would lose"

D.    "American dollar will be worth as much tomorrow as it is today"

E.     "Our best days lie ahead"

None of the above is true today and clearly none of the above was true immediately after the Nixon shock.  Anytime one country unilaterally repudiates an agreement, one can expect that there will be some ugly long-term ramifications.  Our global monetary system has been in disarray over the past forty-two years, suffering from erratic and persistent inflation, recession, and the booms and busts of economic cycles.


The average annual inflation rate since 1971 is 4.26%, so that $100,000 in 1971 would be the equivalent of $576.657 today.  Looking at it the other way, $1 in 2013 would be worth a mere $0.17 in 1971.  Whereas, $100,000 worth of gold, priced at $35 an ounce in 1971 would as of today be priced at $1,257 per ounce or the total of   $3,591,428.40.  Clearly, since the deliberate devaluation of the dollar, the dollar has not stabilized, has not been worth as much tomorrow as it was yesterday, has not halted inflation, and our best days look quite troubled, given the massive deficits that the US Government is presently and persistently running.


As for the international monetary speculators, they are alive and well.  In fact, these are the biggest benefactors from our floating exchange rate system.  The international monetary speculators are able to use their size, power, and sophistication to run havoc over third world nations; they undercut their democratic process, they determine how funds are allocated within these countries, they benefit the few and politically connected while punishing the many and powerless.


The dollar today is a fiat currency and it has degraded itself considerably since its introduction as such in 1971.  This is the shell game of all shell games and it can only end badly.  The dollar as we know it will not exist in 100 years.  When the fox is guarding the henhouse, it will only be a matter of time.  The collapse will come, it is inevitable, and it will be terrifying.