what is the nixon shock 
the nixon shock refers to the aftereffect of a set of economic policies announced by president richard m nixon in 1971 most notably the policies eventually led to the collapse of the bretton woods system of fixed exchange rates that took effect after world war ii understanding the nixon shockthe nixon shock followed president nixon s televised new economic policy address to the nation on august 15 1971 the crux of the speech was that the u s would turn its attention to domestic issues in the post vietnam war era nixon outlined three main goals 12nixon cited tax cuts and a 90 day hold on prices and wages as the best options for boosting the job market and tamping down inflation as for speculative behavior toward the u s dollar usd nixon supported suspending the dollar s convertibility into gold in addition nixon proposed an additional 10 tax on all imports that were subject to duties similar to the strategy of suspending dollar convertibility the levy was intended to encourage the u s primary trading partners to raise the value of their currencies 1the bretton woods system was developed during an international conference held at bretton woods new hampshire in 1944 it involved the external values of foreign currencies fixed to the u s dollar these values were expressed in gold at a price determined by congress in 1958 foreign currencies became convertible into gold 3however a global dollar surplus imperiled the system in the 1960s at the time the u s did not have enough gold to cover the volume of dollars circulating throughout the world that led to an overvaluation of the dollar 4the government attempted to shore up the dollar as well as the bretton woods system with the kennedy and johnson administrations trying to deter foreign investment limit foreign lending and reform international monetary policy however their efforts were largely unsuccessful 4anxiety eventually crept into the foreign exchange market with traders abroad fearful of an eventual dollar devaluation as a result they began selling usd in greater amounts and more frequently after several runs on the dollar nixon sought a new economic course for the country nixon s speech was not received as well internationally as it was in the u s many in the international community interpreted nixon s plan as a unilateral act in response the group of ten g 10 industrialized democracies decided on new exchange rates that centered on a devalued dollar in what became known as the smithsonian agreement that plan went into effect in december 1971 but it proved unsuccessful beginning in february 1973 speculative market pressure caused the usd to devalue and led to a series of exchange parities amid still heavy pressure on the dollar in march of that year the g 10 implemented a strategy that called for six european members to tie their currencies together and jointly float them against the dollar that decision essentially brought an end to the fixed exchange rate system established by the bretton woods agreement 4the bretton woods agreement created two major institutions that have stood the test of time the international monetary fund and the world bank aftereffects of nixon shockinitially nixon s economic policies were widely praised as a political success today however their long term benefits are a matter of scholarly debate first the policies were the primary catalyst for the stagflation of the 1970s they also led to the instability of floating currencies as the u s dollar sank by a third during the 1970s over the past 40 years the u s dollar has been anything but stable with several periods of severe volatility from 1985 to 1995 for example the u s dollar value index lost as much as 34 after quickly recovering it fell sharply again from 2002 to mid 2011 5nixon also promised that his move would prevent costly recessions over the past few decades however the u s has suffered severe recessions including the great recession of december 2007 to june 2009 advantages and disadvantagesthe nixon administration s 1971 economic policy actions have provided advantages as well as disadvantages today we live in a world of mostly free floating market traded currencies this system has its benefits especially when facilitating radical monetary policy actions such as quantitative easing qe central banks have a greater degree of control over their nations money and the management of variables such as interest rates overall money supply and velocity on the other hand nixon s move also created uncertainties and led to a massive financial market based on hedging the risks created by currency uncertainty the financial crisis of 2007 2008 in particular proved that central bank control is no guaranteed defense against severe recessions many decades after the nixon shock economists are still debating the merits of this remarkable policy shift and its eventual ramifications government backed money is generally more stable than commodity based currencycentral banks have more flexibility to protect their economies from severe busts of the business cycleactions to protect gold reserves that triggered economic volatility are no longer necessaryled to stagflation of the 1970ssevere recessions and u s dollar volatility still occur under the watch of central banksgold provided a self regulating effect on the economy and currency while the nixon shock empowered the government to manipulate variables