WI: Nixon keeps the gold standard?

Archibald

Banned
I've never understood the full meaning of that decision. Can someone explain the origins and consequence of Nixon decision happened on August 15, 1971 ?
Was the anterior situation unsustainable past 1971 ?
 
I've never understood the full meaning of that decision. Can someone explain the origins and consequence of Nixon decision happened on August 15, 1971 ?
Was the anterior situation unsustainable past 1971 ?
The Bretton-Woods system had been set up in 1944 basically to stabilize international trade after the conclusion of the Second World War, and aid in reconstruction of Europe. Specifically, it hoped to prevent the break down of international trade that occured through the 'beggar-thy-neighbor' policies of the Great Depression, which largely ended up reducing international trade to currency blocks such as the Sterling zone etc.

Basically, Bretton-Woods required that all currencies be pegged to the US dollar to maintain stable exchange rate, and in turn, the US dollar was convertible to gold, specifically at a rate of $35 per troy ounce. It's not a true gold standard, but a modified one. The value of the dollar is still determined like a fiat currency, it is just also fixed to a certain amount of gold. In effect, the Federal Reserve basically determined the base world market value of gold through it's currency operations.

It was unsustainable in the long term, largely because the value of gold was usually higher than the set exchange rate, and so the US gold reserve depreciated from 60% to about 22% of the world gold supply. In the face of the growing wealth of the rest of the world, and the huge obligations the US took on in Vietnam and in the Cold War arms race, it could no longer be sustained. Hence, the end of gold convertibility.
 
I was going to pop in and explain why the gold standard had to be dropped but someone else explained it well.

However a thought does occur, could the standard have been kept if there was some method for adjusting the $ 35 value to better reflect the real value of gold but keeping world currencies pegged to the dollar ?

I don't know it would work there either but it's a thought
 
I actually had a thread on this topic several months ago and it was dismissed as quasi-ASB. The only thing that occurs to me offhand is if there is no 'perfect storm' in the late 60's then they might, as has been suggested, be able to retain the principle, though at a higher price per ounce.
IIRC the system was popular with European central banks, so perhaps there is a basis for an effort to sustain/revive Bretton Woods.
https://www.alternatehistory.com/discussion/showthread.php?t=178198
 
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At the time, Nixon decision to withdraw from Bretton-Woods and cut the last remaining link between USD and gold was referred to as "closing the gold window", referring to the way currency redemptions were rapidly drawing down the US gold reserves.

If Nixon doesn't close the gold window, the only other reasonable alternatives would be to devalue the dollar's official gold exchange rate or to reduce the money supply to cause deflation (lowering the market price of gold in dollars to below the official exchange rate, so overseas investors would prefer to hold dollars than exchange them for gold at the official rate). The former is still a violation of Bretton-Woods, and still negatively affects the credibility of the USD as an international reserve currency (effectively, the same downside as closing the gold window, but with less of the an upside since you'll need to do the same thing again in a few years when the official exchange rate is out of whack again). The latter would require a major change in Federal Reserve policy (difficult for Nixon to do, since the Fed is designed to be insulated from short-to-medium term political pressure), and would also have major domestic economic repercussions as deflationary shocks are generally considered bad for the economy (as a decline in nominal wages and prices makes existing debts harder to pay back (your salary goes down 10%, but your mortgage payment stays the same), and as declines in market-clearing nominal prices tend to lead to increased unemployment in the short-to-medium term ("sticky wages")).

I generally refer to the Bretton Woods period in the US as the "make-believe gold standard", the real gold standard (where banknotes and gold are freely exchangable at a fixed exchange rate) ended in 1933 when FDR banned private ownership of gold specie in the US and devalued the rate at which dollars could be redeemed for gold by overseas central banks.
 
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