Nixon shock

Empirical methods Prescriptive and policy The Nixon shock was the effect of a series of economic measures, including wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the United States dollar to gold, taken by United States president Richard Nixon on 15 August 1971 in response to increasing inflation.

Conference attendees had hoped that this new system would "ensure exchange rate stability, prevent competitive devaluations, and promote economic growth".

Countries now settled their international accounts in dollars that could be converted to gold at a fixed exchange rate of $35 per ounce, which was redeemable by the U.S. government.

With the Marshall Plan, Japan and Europe were rebuilding from the war, and countries outside the U.S. wanted dollars to spend on American goods—cars, steel, machinery, and the like.

Furthermore, a negative balance of payments, growing public debt incurred due to the Vietnam War, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s.

American economist Barry Eichengreen wrote: "It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one.

[11] Also in August French President Georges Pompidou sent a battleship to New York City to remove France's gold deposits.

On the afternoon of Friday, August 13, 1971, Burns, Connally, and Volcker, along with twelve other high-ranking White House and Treasury advisors, met secretly with Nixon at Camp David.

[18]The Nixon shock has been widely considered to be a political success but an economic failure for bringing on the 1973–1975 recession, the stagflation of the 1970s, and the instability of floating currencies.

"[6][21] 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.

According to Douglas Irwin in World Trade Review's report "The Nixon Shock After Forty Years: The Import Surcharge Revisited", for several months, U.S officials could not get other countries to agree to a formal revaluation of their currencies.

It forced Japan's central bank to intervene significantly in the foreign exchange market to prevent the yen from increasing in value.