August 15 1971

Sunday evening. August 15, 1971. President Nixon appeared on American television and said something that would quietly reshape every economy on earth.

He announced that the United States was suspending the convertibility of the dollar into gold. Temporarily, he said.

It was never reversed.

Here’s the context. After World War II, the world’s major economies agreed on a system called Bretton Woods. The US dollar would be the world’s reserve currency, backed by gold at $35 per ounce. Every other country’s currency was pegged to the dollar. The dollar was the anchor. Gold was the anchor’s anchor.

By 1971, the US had been spending heavily — on the Vietnam War, on domestic programs, on a Cold War arms race. There were more dollars in circulation than the US had gold to back. Other countries, particularly France, had started suspecting this and were quietly exchanging their dollars for gold before the music stopped.

Nixon’s move was essentially a default — a government saying it could no longer honour its promise.

After 1971, for the first time in modern history, every major currency in the world was backed by nothing except government decree and collective belief. The financial term for this is fiat — from the Latin word meaning let it be done. Money by government order.

If you’ve ever wondered why everything seems more expensive than it used to be, this Sunday night is a reasonable place to start looking.

Tomorrow: what “backed by nothing” actually means for your savings, your salary, and your future.

— The Daily Bit