There was a major change to US economic policy relating to the dollar in 1971 under President Nixon. Actually, the trouble began in 1970, as the Vietnam war continued to grind along and the US was running a trade deficit for the first time that century. The idea that we could keep even a semblance of gold in reserve to back up the value of the dollar was revealed to be an absolute fantasy. Coverage dwindled from 55% to 22%. Many economists believe was the exact point at which dollar holders lost faith in the US government’s ability to cut budget and trade deficits.
Washington’s answer? Print more and more dollars to ship overseas to fund military and social programs. In the first six months of 1971, $22 billion in assets left the country. Among other measures, Nixon made the decision (without consulting the IMF or even his own State Department) to unhitch the value of the dollar from gold completely. This meant a person could no longer convert dollars directly to gold through the government. The only way to get gold was to buy it on the open market at whatever the prevailing rate was at the time.
By 1976, all major world currencies were floating. Now the exchange rate was no longer the principal way governments’ administered monetary policy. They, too, had to head out into the open marketplace and try to control currency rates that way, or they could take the chicken way out and just keep printing more and more money, like the US continues to do this very day.
