What happened in 1971? The Nixon Shock!

The Nixon Shock!

In 1971, President Richard Nixon made the decision to remove the United States dollar from the gold standard, a system in which the value of the dollar was directly tied to the value of gold. This decision, known as the Nixon Shock, had a number of significant consequences for the global economy.

One immediate consequence of the Nixon Shock was that it allowed the Federal Reserve to greatly increase the money supply in the United States (see below graph). This led to higher inflation, as there were more dollars in circulation but no corresponding increase in the amount of goods and services available to purchase. This inflation was particularly damaging to those on fixed incomes, such as retirees, and it also made it more difficult for businesses to predict future costs and plan accordingly.

Another consequence of the Nixon Shock was that it led to a dramatic increase in the trade deficit in the United States. Without the gold standard to back the dollar, other countries were less likely to want to hold dollars as a reserve currency. This led to a decrease in the value of the dollar on the global market, making imports more expensive and exports less competitive.  The below chart shows how the productivity trend decoupled from compensation in 1971.

The Nixon Shock also had long-term consequences for the global economy. By breaking the link between the dollar and gold, it led to a shift towards floating exchange rates, that determines the value of a currency by supply and demand in the foreign exchange market. This has made it more difficult for governments to control the value of their currency, and it has also led to increased volatility in currency values.

Consequences of the Nixon Shock

Overall, the Nixon Shock of 1971 had a number of significant consequences for the United States and the global economy. It led to higher inflation, a larger trade deficit, and a shift towards floating exchange rates. We still feel the consequences of the Nixon shock today and and it continues to lead to more volatile and uncertain global economic environment. A clearly illustration (see below) of those consequences, is the time it takes for an average American to buy to buy an average house. It has almost tripled since the Nixon shock!

The main driver for those consequences is the unlimited and excessive printing of USD by the government. And unfortunately this has gotten worst with the COVID crises where the FED printed more than 50% of the entire volume of USD in less than two years. This is one of the main arguments for Bitcoin, because it has a fixed supply of  21 million, making it a hard asset. This is one of the reasons why Fidelity believes one Bitcoin could be worth $100 million by 2035. If you want to understand more about it please check our Bitcoin Business Case Course.

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