The Nixon Shock and Floating Currencies

On August 15, 1971, President Richard Nixon announced that the United States would stop converting dollars into gold for foreign governments, imposed a 10 percent surcharge on imports and introduced wage and price controls. The 'Nixon shock' ended the dollar's gold link and with it the core of Bretton Woods. The December 1971 Smithsonian Agreement tried to rescue fixed rates by devaluing the dollar to $38 an ounce and widening currency bands, but speculative pressure returned, and by March 1973 major currencies were floating.

Supporters of floating, such as Milton Friedman, argued that market-set rates would adjust smoothly and free countries to set their own monetary policy. Critics feared volatility and inflation, and the 1970s did bring high inflation and oil shocks. The 1976 Jamaica Accords formally let countries choose their exchange rate arrangements, ending the attempt to restore the old system.