No More Gold. So What Runs the Money Now?
CPI Series: Part 8
The gold standard died on a Sunday night in August 1971. Not with a collapse or a panic, but with a televised speech from the Oval Office and a decision that had been, in truth, inevitable for years. To understand why it was inevitable, and what it means that it happened the way it did, it helps to know the sixty-year history that led to that evening. That history is covered in the previous part of this series. What follows is the moment itself, and what came after.
That moment was the evening of Sunday, August 15, 1971, when Richard Nixon interrupted regular television programming to address the nation. The speech seemed to be about the economy, but most Americans watching could not have predicted what came next. Nixon announced that the United States would immediately suspend the convertibility of the dollar into gold. Foreign governments and central banks that held dollars could no longer exchange them for gold at the Federal Reserve. The $35-per-ounce peg: the foundation of the Bretton Woods system, the anchor of the entire postwar international monetary order, was gone, effective that night (1).
Nixon called it the New Economic Policy. History has called it the Nixon Shock. The word “shock” is apt, but not because the decision came out of nowhere. By the summer of 1971, it was the most predictable outcome of choices made years earlier by people who believed they could have something that the gold standard had always insisted you could not: both guns and butter, simultaneously, indefinitely, without consequence.
To understand why the tether snapped, you must go back to the decade that made it inevitable.
Guns and Butter and the Bill That Came Due
Lyndon Johnson came to the presidency in 1963 with two enormous ambitions that were individually achievable but simultaneously incompatible with a gold-backed currency at anything like the existing scale. The first was the Great Society, the most expansive extension of the federal government since the New Deal, encompassing Medicare, Medicaid, federal education funding, the War on Poverty, and dozens of other programs. The second was Vietnam, which by the mid-1960s had grown from an advisory mission into a full-scale land war consuming billions of dollars a year (2).
Johnson refused to choose between them, and he refused to fully pay for either through taxation. A significant tax increase to finance the war would have been politically explosive and would have undercut his domestic agenda. So the spending went forward largely on borrowed money and expanded credit. The money supply grew. Prices began to rise. And with every dollar that left the United States to pay for imported goods, foreign oil, or overseas military operations, the gap widened between the dollars circulating in the world and the gold in Fort Knox that was supposed to back them (3).
The Europeans noticed first. Charles de Gaulle of France had been suspicious of dollar dominance since the early 1960s, “arguing that the United States enjoyed what his Finance Minister Valéry Giscard d’Estaing famously called an ‘exorbitant privilege,’” the ability to run deficits indefinitely because the world was required to absorb its currency as a reserve asset (4). Beginning in the mid-1960s, France began systematically converting its dollar reserves into gold, forcing the United States to ship physical gold across the Atlantic. Other countries followed. Fort Knox was draining.
The math was becoming impossible to ignore. In 1948, the United States held roughly 70 percent of the world’s monetary gold reserves. By 1971, that share had fallen to less than a quarter of its postwar peak, a trajectory documented across multiple independent sources, including contemporaneous Treasury records and international monetary analyses of the period, while dollar liabilities held by foreign governments had grown to roughly three times the value of remaining gold stocks (5). Every foreign government that held dollars was, in effect, holding a claim on gold that no longer existed in sufficient quantity to honor. The $35 peg was fiction sustained only by the collective willingness to pretend otherwise.
Three Doors, No Good Ones
By the time Nixon took office in 1969, his economic advisors understood the problem clearly. The options, such as they were, fell into three categories, none of them comfortable.
The first was to defend the peg through deflation, to contract the money supply, accept a recession, reduce imports, and restore the balance between outstanding dollars and gold reserves. This was what the gold standard’s internal logic demanded. It was also, politically, somewhere between very difficult and impossible. An administration that deliberately engineered a recession to honor an international monetary commitment would not survive the next election.
The second option was to negotiate a multilateral revaluation of the major currencies, essentially a coordinated repricing that would adjust exchange rates to better reflect economic reality without formally breaking the gold link. The Johnson administration had attempted this through various international forums with limited success. Other nations had their own political constraints and were reluctant to accept currency revaluations that would make their exports more expensive (6).
The third option was to cut the link unilaterally, accept the international fallout, and deal with the consequences of a dollar no longer backed by anything physical. This was the option Nixon chose, and by the summer of 1971, with gold reserves draining, a balance of payments crisis deepening, and a presidential election thirteen months away, it was the only option with any realistic path forward (7).
The Sunday Night Announcement
The decision was made at Camp David over a weekend meeting that began on Friday, August 13. Nixon gathered his chief economic advisors, including Treasury Secretary John Connally, Federal Reserve Chairman Arthur Burns, Council of Economic Advisers Chairman Paul McCracken, and others, and presented a package of measures that would be announced before Asian markets opened Monday morning (8).
The gold window would be closed. A 90-day wage-and-price freeze would be imposed to head off immediate inflation. A ten percent surcharge on imports would be levied to pressure trading partners into currency negotiations. And the whole package would be sold to the American public not as a crisis response but as a bold assertion of American economic strength (8).
The speech worked, at least in the short run. Markets reacted positively. The wage and price freeze was popular. The international partners were furious; Connally’s attitude toward allied complaints was famously summarized in his remark that the dollar “is our currency but your problem,” but the world had no realistic alternative to the dollar as a reserve currency. Within two years, the Bretton Woods system of fixed exchange rates had been formally abandoned in favor of floating exchange rates (9). The dollar remained the world’s reserve currency. It just no longer had to answer to gold.
What the 1970s Proved
The decade that followed demonstrated, with some pain, exactly what happened when the anchor was removed, and spending habits did not change. The Nixon-era wage and price controls temporarily suppressed inflation, then unleashed it in a surge when the controls were lifted. The 1973 oil embargo added an external supply shock to the existing monetary expansion. By 1974, inflation had peaked at over twelve percent. It fell briefly, then climbed again through the late 1970s, reaching a monthly peak of nearly fifteen percent in March 1980 (10).
The 1970s inflation was not, at its core, caused by oil. Oil was a contributing factor, but as the economist Alan Blinder and others have documented, the underlying driver was monetary: the Federal Reserve accommodating fiscal deficits and keeping interest rates too low for too long in an environment with no external discipline to resist the temptation (11). Without gold as a constraint, the discipline had to come from somewhere else. In the 1970s, it came from nowhere. The result was stagflation: inflation and stagnant growth simultaneously, a combination that the economics profession had barely conceived of as possible before it arrived.
The Keynesian policy consensus that had dominated economic thinking since the New Deal had no good answer for stagflation. Its models assumed a trade-off between inflation and unemployment. Stagflation broke that trade-off. The intellectual frameworks that policymakers relied on were, suddenly, inadequate for the world they were trying to manage (12). Something had to change.
Volcker and the New Floor
In August 1979, Jimmy Carter appointed Paul Volcker as Chairman of the Federal Reserve. Volcker understood that the problem was fundamentally one of credibility: the Fed had spent a decade accommodating inflation rather than fighting it, and markets, businesses, and workers had adjusted their expectations accordingly. Everyone was pricing in continued inflation, which made it self-fulfilling. Breaking that cycle required something dramatic enough to convince people that the rules had genuinely changed (6).
What he did was raise interest rates to levels that had no peacetime precedent in American history. The federal funds rate peaked at 19.1 percent in June 1981. Mortgage rates climbed above eighteen percent. The economy went into a severe recession. Unemployment reached nearly eleven percent in late 1982, and the political pressure on the Fed was intense. Congress held hearings. Farmers drove tractors to Washington to protest. Reagan’s public support for Volcker held, but members of his own party in Congress were furious, and the administration privately made clear it wanted rates to come down (13).
It worked. Inflation broke. By 1983, it had fallen from its peak of nearly fifteen percent to below three percent, and it stayed low. The Volcker disinflation was the most decisive demonstration in modern economic history that a central bank with sufficient independence and sufficient conviction could control inflation even in a fully fiat system. But it also clarified, at enormous cost, what the new rules of the game were: without gold as an external constraint, the only discipline on the money supply was the Federal Reserve’s own judgment and the credibility it had built or squandered over time (14).
A New Anchor With a Crack Nobody Noticed
This is where the history of American money and the question at the center of the NETs framework finally converge.
After 1971, the dollar was backed by nothing physical. After Volcker, it was backed by something more abstract: the Federal Reserve’s commitment to price stability, expressed through interest-rate policy and measured against a target. That target, the number the Fed watches, the number it adjusts policy to hit, the number that replaced gold as the external discipline on monetary expansion, is inflation. Specifically, the two percent inflation target that the Fed formally adopted in 2012, but had been implicitly operating against for decades before that (15).
And the measure used to track whether that target is being hit, the ruler against which monetary policy is calibrated, the number that replaced the gold reserve ratio as the check on the money supply, is the Consumer Price Index.
Follow the chain back from here. The dollar is fiat because gold could not accommodate the scale and speed of the modern economy. The Fed manages the dollar because someone must always hold power over money, and after 1907, that person needed an institutional form. The Fed targets inflation because Volcker proved that’s how you maintain credibility in a fiat system. And inflation is measured by CPI because that’s the tool that existed when the framework was built. It was constructed through the 1930s, and standardized in its modern form in 1940, when the productivity measurement infrastructure that would have revealed its blind spot did not yet exist.
Every layer of that structure was built in response to the failure of the layer before it. Hamilton’s bank replaced monetary chaos. The National Banking Acts replaced wildcat banking. The Federal Reserve replaced the era of private panic management. The abandonment of gold replaced a constraint that had become a trap. The inflation target replaced the undisciplined monetary policy of the 1970s. And CPI, the number at the bottom of all of it, the final measuring stick for the whole edifice, was built when the tools to build it better simply were not available.
That is not a conspiracy. It is not even a failure, in the sense of negligence or bad intent. It is the normal, recurring story of human systems: we solve the problem in front of us with the best tools we have, the solution works until the world changes, and the next generation inherits both the achievement and the blind spot baked into it.
The blind spots do not compound so much as they migrate, always one step ahead, always embedded in the foundation of whatever we just built to fix the last thing. The gold standard’s blind spot was velocity and distribution. The Bretton Woods system’s blind spot was the impossibility of running a global reserve currency within domestic fiscal constraints. The post-1971 fiat system’s blind spot is that the ruler we use to measure monetary stability, CPI, was built before we had the tools to see what it cannot measure.
That last blind spot is what the NETs framework is about. Not a critique of the people who built the system. Not an accusation that the numbers are being manipulated. A recognition that the measuring instrument has a structural limitation inherited from the conditions under which it was constructed, and that once you see the limitation, you cannot unsee what it implies for everything built on top of it.
The 200-year arc from the Continental dollar to the Nixon Shock to the two percent inflation target is not a story of corruption or conspiracy. It is a story of human beings solving hard problems, each solution becoming the foundation for the next set of problems, and the measuring tools always lagging slightly behind the complexity of what they measure.
Understanding that arc is not an argument for despair. It is an argument for honesty about what the ruler is measuring, and what it is not. It is the difference between Net Inflation and Gross Inflation.
References
Nixon, R. M. (1971, August 15). Address to the nation outlining a new economic policy: “The challenge of peace.” Public Papers of the Presidents of the United States. https://www.presidency.ucsb.edu/documents/address-the-nation-outlining-new-economic-policy-the-challenge-peace
Beschloss, M. (2018). Presidents of war. Crown.
Bremner, R. P. (2004). Chairman of the Fed: William McChesney Martin Jr. and the creation of the modern American financial system. Yale University Press.
Eichengreen, B. (2011). Exorbitant privilege: The rise and fall of the dollar and the future of the international monetary system. Oxford University Press.
Eichengreen, B. (2008). Globalizing capital: A history of the international monetary system (2nd ed.). Princeton University Press.
Volcker, P., & Gyohten, T. (1992). Changing fortunes: The world’s money and the threat to American leadership. Times Books.
Matusow, A. J. (1998). Nixon’s economy: Booms, busts, dollars, and votes. University Press of Kansas.
Garten, J. E. (2021). Three days at Camp David: How a secret meeting in 1971 transformed the global economy. HarperCollins.
James, H. (1996). International monetary cooperation since Bretton Woods. Oxford University Press.
Bureau of Labor Statistics. (2024). Historical consumer price index data. U.S. Department of Labor. https://www.bls.gov/cpi/
Blinder, A. S. (1979). Economic policy and the Great Stagflation. Academic Press.
Yergin, D., & Stanislaw, J. (1998). The commanding heights: The battle for the world economy. Simon & Schuster.
Meltzer, A. H. (2009). A history of the Federal Reserve, Volume 2, Book 2: 1970-1986. University of Chicago Press.
Goodfriend, M., & King, R. G. (2005). The incredible Volcker disinflation. Journal of Monetary Economics, 52(5), 981-1015.
Bernanke, B. S. (2013). The Federal Reserve and the financial crisis. Princeton University Press.
Author: Kyle Novack
May 29, 2026
A Monumental Venture, LLC: research project (Novack Equilibrium Theory – NETs)
Attribution Required: © 2025–2026 Kyle Novack / Monumental Venture, LLC. For educational use with credit; commercial use requires permission. Full details in linked PDFs.
Great post. I still have to go back and read the past few!