1. Historical Context
Under the Bretton Woods agreement of 1944, foreign central banks could redeem their paper US dollars for physical gold from Fort Knox at a fixed, guaranteed rate of $35 per ounce.
2. The Breakdown Event
In the late 1960s, massive spending on social programs and the military cost of the Vietnam War forced the US to print more dollars than it could back with gold. Fearing the end of convertibility, foreign central banks (such as those of France and England) began to repatriate their physical gold from New York. On August 15, 1971, President Richard Nixon announced in a television address the temporary suspension of the convertibility of the dollar into physical gold, unilaterally breaking the Bretton Woods system.
3. Global Economic Impact
The 'Nixon Shock' definitively ended the last vestige of the global gold standard, inaugurating the era of 100% fiat money (fiat), whose value is supported only by the legal decree of the issuing government and public confidence in the system.
Key Financial Lesson (Psychology of Money)
Government metallic convertibility promises are vulnerable to fiscal crises or prolonged wars. Devaluation or suspension of convertibility is the classic response of the issuing states.
4. Practical Case or Real Life Example
The resulting free float allowed a historically unprecedented global monetary expansion, completely reconfiguring international public debt.