Nixon Shock
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The term Nixon Shock is used to refer to two different policy measures taken by U.S. President Richard Nixon in 1971 and 1972.
In 1971 Nixon unilaterally cancelled the Bretton Woods system and stopped the direct convertibility of the United States dollar to gold. The second shock was the 1972 Nixon visit to China that brought a surprising new twist to Cold War diplomacy.
[edit] The end of the Bretton Woods system
By the early 1970s, as the Vietnam War accelerated inflation, the United States was running not just a balance of payments deficit but also a trade deficit (for the first time in the twentieth century). The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar had lost faith in the U.S. ability to cut its budget and trade deficits.
In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for the nation's military expenditures and private investments. In the first six months of 1971, assets for $22 billion fled the United States. In response, on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed(ing) the gold window," making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even with his own State Department, and was soon dubbed the Nixon shock.
The surcharge was dropped in December 1971 as part of a general revaluation of major currencies, which were henceforth allowed 2.25 percent devaluations from the agreed exchange rate. But even the more flexible official rates could not be defended against the speculators. By March 1976, all the world's major currencies were floating—in other words, exchange rates were no longer the principal target used by governments to administer monetary policy.
