Volume II · After Gold · Money Research

01 — The Break, 1971–1976: From the Nixon Shock to Legalised Floating

What actually happened on 15 August 1971

On 15 August 1971 Nixon announced a package that included a 90-day wage-and-price freeze, a 10% import surcharge and suspension of official dollar-to-gold convertibility. The gold measure ended the United States' Bretton Woods obligation to convert dollar holdings of foreign monetary authorities into gold at the official price; it did not prohibit private gold trading or every domestic gold-linked contract. Treasury Secretary John Connally and Under-Secretary Paul Volcker participated in the Camp David policy discussions. Federal Reserve History, “Nixon Ends Convertibility”; IMF institutional history, chapter 25.

Foreign official dollar claims had grown relative to the US reserves available for settlement, and conversions into US gold put the official commitment under pressure. By 15 August, the IMF records liabilities to foreign official authorities exceeding US official reserves by almost $30 billion. US inflation, balance-of-payments deficits, monetary policy, and spending on Vietnam and Great Society programmes all formed part of the background; none of these measures alone establishes that closing the gold window was inevitable. IMF institutional history, chapter 25; Federal Reserve History, “The Great Inflation”.

The Smithsonian Agreement (December 1971)

The August suspension disrupted the existing parities while governments negotiated. At the Smithsonian Institution in Washington in December 1971, the Group of Ten agreed a currency realignment and wider exchange-rate bands. The US official gold price moved from $35 to $38 an ounce as a par-value measure, although the official conversion window remained closed; the permitted fluctuation band widened from ±1% to ±2.25%. The arrangement lasted only until the further dollar devaluation and widespread floating of early 1973. Federal Reserve History, “The Smithsonian Agreement”.

The agreement did little to restore confidence. During 1972, intervention at the wider exchange-rate bands left European central banks holding more unwanted dollars, while US inflation and balance-of-payments pressures persisted. On 12 February 1973 the United States announced another dollar devaluation, to about $42 an ounce; speculation intensified when markets reopened, and within a month nearly all major currencies floated against the dollar. This sequence does not prove a single cause or what traders already knew. Federal Reserve History, “The Smithsonian Agreement”.

Europe tries to keep fixed rates among itself

Several European governments continued to seek narrower exchange-rate movements among their currencies. The Community's “snake” operated from April 1972, but participation changed; by the mid-1970s the Deutsche Mark, Benelux currencies and Danish krone formed its core. The European Monetary System and its Exchange Rate Mechanism began in March 1979 and aimed to reduce exchange-rate variability among participating Community currencies. These were steps in European monetary cooperation, whose later treaty and institutional choices led to the euro (“The Cold War Ends”). ECB, *History, Role and Functions*, pp. 15–16; ECB, ERM history.

The oil shock forces the issue (1973–74)

The Yom Kippur War of October 1973, the OPEC embargo and higher oil prices added a severe terms-of-trade and inflation shock after major currencies had already begun floating (“Oil, Petrodollars and Stagflation, 1973–1982”). Those pressures complicated exchange-rate management and the search for new rules; the oil shock alone cannot explain the earlier 1971 gold suspension, the March 1973 move to floating, or every later decision to retain it. IMF, *The Impact of Higher Oil Prices on the Economy*, Appendix; Federal Reserve History, “Oil Shock of 1973–74”.

Herstatt and the birth of banking rules (1974)

On 26 June 1974 German regulators closed Bankhaus Herstatt after counterparties had paid Deutsche Marks in Frankfurt but before receiving the corresponding dollars in New York. Herstatt's New York correspondent stopped its outgoing payments, leaving those counterparties exposed to the full amount they had delivered. This is foreign-exchange settlement risk: the two currency legs settle at different times, and the counterparty can fail between them. A fixed exchange rate would not itself make both payments simultaneous or eliminate counterparty risk; exchange-rate volatility is a different risk. The disruption helped prompt the G10 central bank governors to establish what became the Basel Committee on Banking Supervision at the end of 1974. BIS, “Uncovering FX settlement risk,” 2026, introduction.

Legalising the accident: the Jamaica Accords (1976)

Reform negotiations followed the breakdown of the par-value system. In January 1976, at Kingston, Jamaica, the IMF's Interim Committee agreed changes that became the Second Amendment to the Articles of Agreement, in force on 1 April 1978. The amendment changed several IMF rules:

It allowed members to choose exchange arrangements, including floating or pegs to another currency or basket, while excluding maintenance of a currency's external value in terms of gold. Members remained subject to IMF exchange-policy obligations and surveillance. IMF, Second Amendment legal analysis.

It reduced gold's formal role in IMF operations. The amendment removed gold as the common denominator of IMF par values and the basis for SDR valuation, abolished the official gold price and obligatory gold payments to the IMF, and set the objective of making the SDR the system's principal reserve asset. The IMF's separately agreed 1975–80 disposition sold part of its own gold by auction and returned another part to members. This did not stop monetary authorities from holding gold as a reserve asset. IMF Annual Report 1978, “Gold” and “Special Drawing Rights”; IMF, “Gold in the IMF”.

It replaced administration of fixed parities with IMF surveillance of members' exchange-rate policies. IMF lending and programme conditions are separate powers and practices, which developed through later decisions and country arrangements (“Debt Crises and the Managed Dollar, 1982–1990” and “Globalization and the Emerging-Market Crises, 1990–2001”).

It did not designate the dollar as the system's sole reserve currency. The dollar remained a major official reserve and international transaction currency, while other currencies and gold continued to have roles.

In the United States, private ownership of gold became legal again on 31 December 1974. Treasury and IMF gold sales occurred under different policies and legal authorities; they do not establish that official institutions universally treated gold as “just a commodity.” Gold remained an official reserve asset, even as its market price moved independently of the former IMF official price. IMF Annual Report 1978, “Gold”; IMF, “Gold in the IMF”.

What floating did to the world economy

More currencies floated against the dollar after March 1973, changing the pattern of exchange-rate risk for firms and banks. Chicago currency futures began trading on 16 May 1972 and Cboe listed equity options on 26 April 1973; later currency swaps and other derivatives supplied additional ways to manage exposures (“Innovation”). Their development cannot be assigned to floating alone. CME Group, product anniversaries; Cboe, listed-options history. In the BIS's defined over-the-counter survey, global foreign-exchange turnover averaged $7.5 trillion per day in April 2022; that observation is not directly comparable with unlocated 1973 or 1995 estimates. BIS, 2022 Triennial Survey commentary. At Rambouillet in November 1975, six industrial-country leaders discussed monetary stability and broader economic coordination before the January 1976 Jamaica agreement; their declaration did not simply approve a completed Jamaica deal. Élysée, Rambouillet declaration, 17 November 1975.

Key takeaways

The Nixon shock combined a wage freeze, an import tariff and a suspension of dollar–gold convertibility. The Smithsonian Agreement tried to rebuild fixed rates at a lower dollar but did not last. Major currencies floated against the dollar from 1973; the 1976 Jamaica agreement was implemented through an IMF amendment in 1978. Europe continued to seek exchange-rate stability among its currencies. Herstatt's 1974 failure exposed the danger of paying one leg of a currency trade before receiving the other—a risk that fixed rates alone could not remove—and helped prompt the Basel Committee's creation.