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Another real change that shook the U.S. financial system and dollar proved to be President Nixon’s decision to take the U.S. dollar off of the long standing gold standard. Contrary to what you may believe, he did not turn out to be the first major economy to do this. West Germany and Switzerland were actually the first two countries to withdraw from the Breton-Woods agreement governing the gold standard and international currency exchange.

The United States made the decision to follow suit for several reasons. On the one hand, the rising spending of the government on both domestic programs and the Vietnam War caused the country to realize its first trade deficit and balance of payments deficit in the entire twentieth century. This marked a critical point in the country’s modern finances, as the Austrian School of economics and the Neoclassical economists argue that at this point, countries and individual holders of the dollar gave up on their belief in the government’s ability to reduce trade deficits and its budget.

Because of this, other countries and investors were exchanging their dollars for gold at a shocking rate. Gold coverage pertaining to paper dollars fell by thirty-three points from 55 to 22 percent in only the single year of 1970. As the country continued to print a great number of dollars with which to cover the country’s military bills and domestic spending, more and more gold found its way from the U.S. Treasury to other countries, who surrendered their paper dollars for gold.

France and Switzerland proved to be extremely aggressive in their withdrawal of gold for dollars. France drew down fifty million while Switzerland demanded one hundred and ninety-one million dollars in gold.

The dollar began to drop sharply against other major world currencies like the Deutschmark and the other European countries’ currencies. With this going on, West Germany withdrew from the international agreements. Switzerland followed suit three months later.

Congress began recommending that the country devalue the dollar to defend it.

President Nixon responded with drastic actions. In order to help stabilize the economy, severe inflation, and the dollar, he enacted a series of dramatic moves. He put a ninety day price and wage freeze into effect, levied a ten percent import tax on imports, and ended the U.S. dollar’s convertibility directly to gold. The President and his advisors did this without consulting with the international monetary system representatives, giving it the informal name of the Nixon Shock.

At the time, President Nixon’s policies proved to be very popular domestically. Members of the public gave him credit for saving American citizens from runaway inflation and price gougers. He received accolades for staving off the foreign exchange crisis as well.

Internationally, this abandoning of the gold standard caused the Bretton-Woods agreement to totally collapse. By 1976, all of the important currencies in the world had moved to floating systems.

The dollar’s value no longer resided on a basis of gold value. It now floated based on the concept of an estimated potential future value.

The long term effects proved to be less desirable. Some economists and political scientists have claimed that the 2007 Great Recession developed as a result of the collapse of the Bretton-Woods agreement and the gold standard.

This is because the failure of these arrangements led to a great amount of volatility in money and the creation of instruments that were not properly regulated or were even unregulated. Because of the greater volatility, a need arose for financial instruments that could hedge risk, like derivatives and credit default swaps. These complex off balance sheet arrangements were much credited with leading to the financial meltdown of 2007.