The Goldbug Is Born
On August 15, 1971, without consulting the U.S. Federal Reserve or the State Department, President Nixon closed the “gold window” by suspending the convertibility of dollars for gold thus abolishing the gold standard (peg). Nixon also imposed a 90-day wage and price freeze, and imposed a 10 percent import surcharge on all good and services shipped into the country.
The resultant political crisis caused monetary officials to meet in Washington in late 1971, a pow-wow that resulted in the forging of the Smithsonian Agreement. Under the terms of the agreement, the United States raised the official price of gold from $35 per ounce to $38 per ounce. Also, the United States revalued the dollar versus the yen by 17 percent (dollar devaluated), versus the German mark by 17 percent, versus the British pound by 9 percent, and versus the French franc by 9 percent. In all, the dollar devaluation of 1971 was equivalent to (−) 8.57 percent.
More importantly, the price of gold was allowed to float, and by early 1972, it had soared to $50, as noted in Figure 10.1
Early in 1973 the price of gold broke out above the then high at $70 per ounce, and in February the United States moved again to devalue the dollar, amid a deepening economic recession and virulent asset-disinflation risk.
Along with another increase in the official price of gold, to a wellbelow-market price of $44.22 per ounce, the United States allowed the value of the U.S. dollar (USD) versus other ...