In the early 1970s, inflation caused by rising prices for imported commodities, especially oil, and spending on the
Vietnam War, which was not counteracted by cuts in other government expenditures, combined with a
trade deficit to create a situation in which the dollar was worth less than the gold used to back it.
In 1971, President
Richard Nixon unilaterally ordered the cancellation of the direct convertibility of the United States dollar to gold. This act was known as the
Nixon Shock.
U.S. dollar value vs. gold value
The sudden jump in the price of gold after the demise of the Bretton Woods accords was a result of the significant prior debasement of the US dollar due to excessive inflation of the monetary supply via central bank (Federal Reserve) coordinated fractional reserve banking under the Bretton Woods partial gold standard. In the absence of an international mechanism tying the dollar to gold via fixed exchange rates, the dollar became a pure fiat currency and as such fell to its free market exchange price versus gold. Consequently, the price of gold rose from $35 per troy ounce (1.125 $/g) in 1969 to almost $500 (29 $/g) in 1980.
Shortly after the
gold price started its ascent in the early 1970s, the price of other commodities such as oil also began to rise. While commodity prices became more volatile, the average exchange rate between oil and gold remained much the same in the 1990s as it had been in the 1960s, 1970s and 1980s.
Fearing the emergence of a
specie gold-based economy separate from central banking, and with the corresponding threat of the collapse of the U.S. dollar, the U.S. government approved several changes to the trading on the
COMEX. These changes resulted in a steep decline in the traded value of precious metals from the early 1980s onward.
In September 1987 under the
Reagan administration the
U.S. Secretary of the Treasury James Baker made a proposal through the
International Monetary Fund to use a commodity basket (which included gold).
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