What Happened in 1971?

On Sunday evening, August 15, 1971, millions of American families were settled in to watch Bonanza when the network cut away to the President. Richard Nixon had spent the weekend at Camp David with fifteen advisers, including the Treasury Secretary and the chairman of the Federal Reserve.¹ Now he announced a wage and price freeze, a new tax on imports, and one more measure that he described as "very technical."

"I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets."

President Richard Nixon, address to the nation, August 15, 1971²

He anticipated the obvious worry and addressed it directly. Americans who bought American goods, he said, would find that "your dollar will be worth just as much tomorrow as it is today."² For a day, he was right. The decision he announced that night has shaped the value of every dollar earned and saved since.

The Promise Behind the Dollar

To see what changed, you need to know what came before. In July 1944, with the Second World War still being fought, delegates from forty-four countries met at a resort in Bretton Woods, New Hampshire, to design the money system for the peace that would follow.¹

They built it around the dollar. Other countries fixed their currencies to the dollar, and the United States promised that foreign governments could exchange their dollars for gold at a fixed price of $35 an ounce. Ordinary Americans had been barred from owning gold bullion since 1933, so the promise was made to central banks rather than to citizens. But it tied the whole system to something that could not be printed. Since the United States held about three-quarters of the world's official gold reserves, the system looked secure.¹

More Promises Than Gold

The arrangement carried a flaw that an economist named Robert Triffin pointed out early. The world needed a growing supply of dollars to trade with, and the only way to supply them was for the United States to send more dollars abroad than it took in. Through the 1960s, military spending, foreign aid, and rising imports did exactly that. At home, inflation began to climb.

Each of those dollars held overseas was a claim on American gold at $35 an ounce. Eventually, as the Federal Reserve's own history puts it, "there were more foreign-held dollars than the United States had gold."¹ Foreign governments noticed. Some began presenting their dollars for gold, and the United States faced a choice between raising the price of gold, tightening its own spending sharply, or closing the window. In August 1971 it closed the window.

"Temporarily"

The suspension was announced as temporary. A few months later, in December 1971, the major nations tried to save fixed exchange rates with a new deal called the Smithsonian Agreement, which raised the official gold price to $38. It did not hold, and by 1973 the Bretton Woods system had ended for good.¹ Convertibility never returned.

From then on the dollar was what economists call fiat money: money because the government says so, with no fixed link to any commodity. How many dollars exist became purely a matter of policy.

What It Meant for Ordinary Families

Nixon's price freeze worked for its ninety days, and then inflation came back harder. By March 1980, prices were rising at nearly 15 percent a year.³ Over the longer run, the shift shows up most plainly when the dollar is measured against the thing it used to be tied to. In 1971 an ounce of gold was officially $35. In June 2026 it traded around $4,100.⁴ Measured in gold, the dollar has lost more than 99 percent of its value since the window closed.

That is not the same as saying gold went up. A house, a barrel of oil, or a year of a worker's labor costs roughly what it always has in gold. What changed is the number of dollars it takes to buy them. The sharpest part of the dollar's century-long loss of purchasing power comes after 1971, and many of the trends people feel most, from housing that takes twice as many years of income to buy to savings that shrink while sitting still, steepen from that decade on. Correlation is not proof of cause, and other forces were at work too. But the timing is hard to ignore.

Two Ways to Read the Same Night

Economists still disagree about what August 15 meant, and both views deserve a hearing.

Many economists see it as a necessary modernization. A fixed link to a metal whose supply depends on mining, they argue, ties a large economy's hands in a crisis. Milton Friedman, no friend of inflation, had long argued that exchange rates should float freely rather than be pinned to gold. In this view, 1971 freed central banks to respond to recessions, and the inflation of the 1970s was a policy failure that was later corrected, not a consequence of leaving gold.

Economists of the Austrian school read it the other way. To them, the gold link was the last restraint on governments' ability to spend more than they collect and cover the gap by creating money. Removing it, they argue, turned a slow and limited loss of value into an open-ended one, and transferred wealth from savers to borrowers and to those closest to new money.

You do not have to settle that argument to notice what changed. Before 1971, there was a ceiling on how far the dollar could be stretched, however imperfect. After it, the only ceiling was judgment.

A Promise Kept at a Cost

"Who swears to his own hurt and does not change."

Psalm 15:4

The psalm describes the person who may dwell with God: one who keeps a promise even when keeping it becomes expensive. In 1971, keeping the promise behind the dollar had become very expensive, and it was set aside. Reasonable people can argue it was the least bad option available. It is still worth remembering that money is, at bottom, a promise, and asking who has the power to change the terms.

That question sits at the center of the free first lesson of the course, which follows the dollar from 1913 through 1971 to the present day.