1972 Richard Nixon - "Nixon Shock"

In early 1971, inflation was on the rise and the value of the dollar was dropping.  President Nixon's administration coordinated a plan for bold action.   Nixon and fifteen advisers including the Treasury Secretary John Connaly and Undersecretary for International Monetary Affairs Paul Volcker met secretly at Camp David to create a new economic plan.  There was much debate over what to do, but ultimately Nixon decided to take unilateral action to  end the dollar's convertibility to gold. This action indirectly abolished the existing Bretton Woods system of financial exchange.   Since 1944, the Bretton Woods system was an international monetary system that was based upon dollars that could be converted to gold a field exchange rate of $35 per ounce.   Prior to 1971, the United States was committed to backing every dollar overseas with gold. Other currencies were fixed to the dollar. 

President Nixon first presented his new plan to the nation in August as a way to correct the balance of payments, stave off inflation, and lower the unemployment plan.   The first order of business, was to close the gold window.  Foreign governments could no longer exchange their dollars for gold.  Overnight, the international money system turned into a flat money system.  The second order, was to implement a 90-day freeze on wages and prices to put a check on inflation.   This was the first price and wage control during a time of peace.  Finally, an import surcharge of 10 percent was added to ensure that American products would not be put at a disadvantage because of exchange rates.   

The economic plan was considered a success at  home, but was a shock to many abroad.  Many other countries saw it as an act of worrisome unilateralism.   Yet, after months of negotiation, the Group of Ten (G-10) industrialized democracies agreed to a new set of fixed exchanged rates centered on the devalued dollar.  In his 1972, state of the union address, Nixon characterized this new agreement as "historic" and one that would expand the economy and create new jobs for Americans.

"The historic monetary agreements, agreements that we have reached with the major European nations, Canada, and Japan, will help meet it by providing new markets for American products, new jobs for American workers.

Our budget will help meet it by being expansionary without being inflationary-a job-producing budget that will help take up the gap as the economy expands to full employment."

"Our new monetary and trade agreements will make it possible for American goods to compete fairly in the world's markets--but they still must compete. The new technology program will put to use the skills of many highly trained Americans, skills that might otherwise be wasted. It will also meet the growing technological challenge from abroad, and it will thus help to create new industries, as well as creating more jobs for America's workers in producing for the world's markets."

Finally on March 13, 1973 after further devaluation of the dollar, the G-10 approved an arrangement wherein six members of the European Community tied their currencies together and jointly floated them against the U.S. Dollar effectively abandoning the Bretton Woods fixed exchange rate system in favor of a system of floating exchange rates.

Initially the country enjoyed a a growth in production, but by 1973 the Western world experienced a period of economic stagnation with high unemployment and high inflation.   The dollar plunged by one-third during the 1970's and led to the instability of floating currencies.  "Nixon Shock" and the fall of the Bretton Woods was credited with much of the blame by many economists.   Debate over Nixon Shock continues to this day.

References

Presidency.ucsb.edu. (2018). Richard Nixon: Annual Message to the Congress on the State of the Union.. [online] Available at: http://www.presidency.ucsb.edu/ws/index.php?pid=3407 [Accessed 30 May 2018].

En.wikipedia.org. (2018). Nixon shock. [online] Available at: https://en.wikipedia.org/wiki/Nixon_Shock [Accessed 30 May 2018].

En.wikipedia.org. (2018). 1973–75 recession. [online] Available at: https://en.wikipedia.org/wiki/1973%E2%80%9375_recession [Accessed 30 May 2018].

Ghizoni, S. (2018). Nixon Ends Convertibility of US Dollars to Gold and Announces Wage/Price Controls | Federal Reserve History. [online] Federalreservehistory.org. Available at: http://www.federalreservehistory.org/Events/DetailView/33 [Accessed 30 May 2018].

History.state.gov. (2018). Milestones: 1969–1976 - Office of the Historian. [online] Available at: https://history.state.gov/milestones/1969-1976/nixon-shock [Accessed 30 May 2018].