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  Brief History of the Gold Standard in the United States

Cutting the Links to Gold: 1967-1973
Although there was no private market for gold in the United States, such markets did exist abroad. By the late 1960s, prices in these markets were tending to deviate from official currency prices. The United States and other countries tried to combat this through a series of market interventions in which sizable amounts of the official gold stock were sold. In 1968, these “gold pool” arrangements collapsed. A new policy was adopted in which the private market price of gold would be allowed to deviate from the official settlements price. This made the international monetary arrangement a gold standard in name only.

It was also necessary for the United States to avoid large official settlements in gold. Through diplomatic channels it was made clear that other countries could not expect to redeem large quantities of dollars for gold. This “closing of the gold window” was not an official action, so that it did not constitute an official abandonment of gold. Nor was it an absolute prohibition on gold redemption. However, what had previously been routine became a matter of negotiation.

In August 1971, the Nixon Administration announced that it would not freely convert dollars at their official exchange rate. The measure was intended to be temporary. The gold price of the dollar and official rate of exchange into other currencies were not changed. The intention was to put pressure on other countries to revalue their currencies (and make other concessions). The country did not officially move to a “floating” rate. With no official conversion or redemption taking place, the dollar floated by default.

After a series of negotiations, the “Smithsonian Agreement” was reached in December 1972, by which the dollar would be devalued from $35 per troy ounce of gold to $38 while several other countries revalued their currencies upward. This new value was made official by an act of Congress in March 1972. The new price was the official price of the dollar, and policies were pursued to maintain the dollar’s value relative to other currencies. However, there continued to be no convertibility into gold—even for international transactions. The $38 price was the official price at which the United States neither sold nor purchased gold.

Within a year, it became impractical to maintain the new exchange rate. To do so would have required the United States to redeem more dollars than it had in gold and foreign currency reserves, or to contract the economy to increase the purchasing power of the dollar. In February 1973, the Treasury agreed to devalue the dollar to $42.22 per troy ounce of gold. Within two weeks of the second devaluation, it again became impractical to hold the rate. At that point, despite efforts to reach a new monetary agreement, the dollar was left to float.

The new $42.22 par value was made official in September 1973, long after it had been de facto abandoned. The official rate was never maintained. In October 1976, the government made official what was already true in reality: the definition of the dollar it terms of gold was removed from statute. The monetary system officially became one of pure fiat money.

 13 Congressional Research Service