Opinion | ‘Nixon shock’ still a threat to global economy, 50 years on
- Nixon’s 1971 decision resulted in a widening wealth gap around the world, irresponsible government spending and asset prices that have gone stratospheric
- Hong Kong’s economy remains threatened as long as our currency is pegged to the crumbling US dollar and there are no plans in place in case of a currency reset
Fifty years ago this month, US president Richard Nixon ended gold-to-US dollar convertibility to save the country’s gold holdings from exhaustion. This set the world on the path of a debt-based monetary system that we participate in today.
A key feature of the Bretton Woods System was pegging world currencies to the US dollar – becoming the world’s “reserve currency” – which would link itself to gold at US$35 per ounce. Allowing the dollar to be as good as gold brought confidence in the new economic system and encouraged free trade.
But this new economic order started breaking down in the mid-1960s. Debts incurred by the Vietnam war, welfare programmes and monetary inflation caused gold outflows from the US Bullion Depository at Fort Knox.
Facing an emptying gold vault and a possible sovereign debt default after Britain asked to swap gold for dollars, Nixon announced the issuance of Executive Order 11615 on a Sunday night. This “temporarily” closed the gold window, making the direct convertibility of gold at US$35 per ounce no longer possible.
