Fiat money and the end of gold convertibility (1971)

Wonder

1. How did a country holding most of the world’s monetary gold run short of it within twenty-five years?
2. What does a money promise when it promises nothing in particular?
3. Who decides how much of it exists?

Explore

1. In July 1944, delegates from 44 Allied nations met at Bretton Woods, New Hampshire, to design the post-war monetary order. The dollar was fixed at $35 per ounce of gold and convertible for foreign governments and central banks; other currencies were pegged to the dollar within narrow bands. The conference also created the International Monetary Fund and the World Bank. The United States held most of the world’s monetary gold, which made the promise credible.
2. The design had a flaw, identified by the economist Robert Triffin in 1960. As world trade grew it needed more dollars, and it got them through US deficits. But the more dollars piled up abroad, the less plausible it became that the US could redeem them all at $35. Supplying the world’s reserve asset and keeping it fully convertible pulled in opposite directions: the Triffin dilemma.
3. Through the 1960s the strain showed. US gold reserves fell as foreign holders converted dollars, and spending on the Vietnam War and domestic programs widened deficits. France under Charles de Gaulle converted dollar reserves into gold and attacked the dollar’s “exorbitant privilege,” a phrase usually attributed to his finance minister Valéry Giscard d’Estaing. The London Gold Pool, formed by central banks in 1961 to hold the market price at $35, collapsed in March 1968.
4. On 15 August 1971, President Richard Nixon announced on television that the US would “suspend temporarily” the dollar’s convertibility into gold, together with a 90-day wage and price freeze and a 10% import surcharge. The Smithsonian Agreement of December 1971 tried to rebuild fixed rates at $38 an ounce. It lasted little more than a year: by March 1973 the major currencies were floating, and the Jamaica Accords of 1976 formalized the change.
5. Fiat is Latin for “let it be done.” A fiat currency is redeemable for nothing but itself. Its value rests on legal-tender laws, the requirement to pay taxes in it, and confidence in the institutions that issue it. Supply is set by central banks and the banking system rather than by mining. That flexibility lets authorities respond to crises; it also removes the external limit that gold imposed.
6. Since 1973 no major currency has had a commodity anchor, an arrangement without precedent at that scale; some are pegged to one another, but none to a metal. Price levels in the major economies have risen severalfold since 1971, at rates ranging from double-digit inflation in the 1970s to near zero in the 2010s. Bitcoin, launched in 2009, is one response: a money whose supply follows rules that no issuer can change.

Key facts

Exercise nine, six, three, one

Fact check

Dates, figures and claims checked against the published sources listed below.

• Articles of Agreement, Bretton Woods conference (1944)
• R. Triffin, Gold and the Dollar Crisis (1960)
• R. Nixon, address to the nation, 15 August 1971
• B. Eichengreen, Globalizing Capital (1996)
• US Public Law 93-373 (1974), restoring private gold ownership