Nixon Shock

What Is the Nixon Shock?

Nixon Shock is a phrase used to portray the aftereffect of a set of economic policies promoted by former President Richard Nixon in 1971.

Most eminently, the policies eventually prompted the collapse of the Bretton Woods system of fixed exchange rates that came full circle after World War II.

Understanding the Nixon Shock

The Nixon Shock followed President Nixon's broadcast New Economic Policy address to the nation. The core of the discourse was that the U.S. would direct its concentration toward domestic issues in the post-Vietnam War time. Nixon framed three fundamental objectives for the plan:

1. Making better jobs
2. Stemming the rise in the cost of living
3. Protecting the U.S. dollar from international money examiners.

Nixon refered to tax cuts and a 90-day hold on prices and wages as the best options for supporting the job market and packing down the cost of living. Concerning speculative behavior toward the U.S. dollar (USD), Nixon upheld suspending the dollar's convertibility into gold. Furthermore, Nixon proposed an extra 10% tax on all imports that were subject to duties. Like the strategy of suspending dollar convertibility, the levy planned to support the United States' principal trading partners to raise the value of their currencies.

The Bretton Woods Agreement rotated around the outside values of foreign currencies. Fixed versus the U.S. dollar, the value of foreign currencies was communicated in gold at a price determined by Congress. Nonetheless, a dollar surplus endangered the system during the 1960s. At that point, the U.S. needed more gold to cover the volume of dollars circulating all through the world. That prompted a overvaluation of the dollar.

The government endeavored to support the dollar and Bretton Woods, with the Kennedy and Johnson organizations attempting to deflect foreign investment, limit foreign lending, and change international monetary policy. Notwithstanding, their efforts were largely fruitless.

Nixon Shock and the Bretton Woods Agreement

Nervousness eventually crawled into the foreign exchange market, with traders abroad unfortunate of an eventual dollar devaluation. Subsequently, they started selling USD in greater sums and all the more habitually. After several runs on the dollar, Nixon looked for another economic course for the country.

Nixon's discourse was not received also internationally as it was in the United States. Numerous in the international community deciphered Nixon's plan as a unilateral act. In response, the Group of Ten (G-10) industrialized majority rules systems settled on new exchange rates that fixated on a devalued dollar in what became known as the Smithsonian Agreement. That plan came full circle in December 1971, however it proved fruitless.

Beginning in February 1973, speculative market pressure made the USD devalue and prompted a progression of exchange parities. In the midst of still-weighty pressure on the dollar in March of that year, the G-10 carried out a strategy that called for six European individuals to tie their currencies together and jointly float them against the dollar.

That decision basically brought a finish to the fixed exchange rate system laid out by Bretton Woods.

The Bretton Woods agreement made two major institutions that have endured for an extremely long period: the International Monetary Fund and the World Bank.

Legacy of the Nixon Shock

At first, the Nixon Shock was widely commended as a political achievement. Today, be that as it may, the long-term benefits of the Nixon Shock are an issue of insightful discussion.

In the first place, Nixon's actions were the primary catalyst for the stagflation of the 1970s. It likewise prompted the instability of floating currencies, as the U.S. dollar sank by a third during the 1970s. Throughout the course of recent years, the U.S. dollar has been everything except stable, with several periods of extreme volatility.

From 1985 to 1995, for instance, the U.S. dollar value index lost as much as 34%. After rapidly recovering, it fell forcefully again from 2002 to mid-2011.

Nixon additionally guaranteed that his move would prevent costly recessions. Throughout the course of recent many years, notwithstanding, the U.S. has experienced extreme recessions including the Great Recession of December 2007 to June 2009.

Benefits and Disadvantages of the Nixon Shock

Today, we live in a world of for the most part free-floating, market-exchanged currencies.

This system enjoys benefits, particularly in terms of making revolutionary monetary policy, for example, quantitative easing (QE) conceivable. Central banks presently have a greater degree of control over their own money, making it simple to "make due" factors, for example, interest rates, overall money supply, and velocity.

Then again, Nixon's move likewise made uncertainties and prompted a monstrous market in view of hedging the risks made by currency vulnerability. The financial crisis of 2007-2008, in particular, proved that central bank control is no guaranteed defense against extreme recessions.

Numerous a long time after the Nixon Shock, financial specialists are as yet discussing the merits of this enormous policy shift and its eventual implications.

The gold standard is a monetary system where the value of a country's currency depends on a fixed quantity of gold. In practice, central banks ensured that domestic currency (paper money) was effectively convertible into gold at a specific fixed price. Gold coins likewise coursed as domestic currency alongside other metal coins and notes.

When and Why Did Nixon End the Gold Standard?

President Richard Nixon closed the gold window in 1971 to address the country's inflation problem and to deter foreign governments from recovering an ever increasing number of dollars for gold.

What Is Fiat Money?

Fiat money is government-issued money that isn't backed by a physical commodity like gold or silver. All things considered, backed by the government issued it.

What Would Happen If We Returned to the Gold Standard?

That's what a few financial experts contend on the off chance that we returned to the gold standard, prices would actually undermine, leading to episodes of extreme deflation and inflation.

Besides, in the event of a financial crisis, the government would have little flexibility to either deflect or limit the likely damage.

Features

• Numerous a very long time after the Nixon Shock, financial specialists are as yet discussing the merits of this enormous policy shift and its eventual repercussions.
• The Nixon Shock was the catalyst for the stagflation of the 1970s as the U.S. dollar devalued.
• The Nixon Shock effectively prompted the finish of the Bretton Woods Agreement and the convertibility of U.S. dollars into gold.
• The Nixon Shock was an economic policy shift embraced by President Nixon to focus on the United States' economic growth in terms of jobs and exchange rate stability.
• Much obliged by and large to the Nixon Shock, central banks presently have a greater degree of control over their own money, making it simple to "make due" factors, for example, interest rates, overall money supply, and velocity.