What Happened in 1971 (The Nixon Shock)

On Sunday 15 August 1971 Richard Nixon went on television and said he had directed Treasury Secretary John Connally to "suspend temporarily the convertibility of the dollar into gold or other reserve assets." He also announced a 90-day freeze on wages and prices and a 10 percent surcharge on imports that paid customs duty. The package became known as the Nixon shock. Bitcoiners care about the gold part, usually called closing the gold window: foreign governments and central banks could no longer hand the US Treasury dollars and get gold back at $35 an ounce.

Ordinary Americans had lost that right decades earlier. They were ordered to hand in their gold in 1933, and the Gold Reserve Act of 1934 ended redemption at home. In 1968 Congress removed the gold backing for paper dollars, and owning gold bullion stayed illegal for most Americans until 31 December 1974. The dollar was not devalued on 15 August either: the White House said the official gold price was unchanged, though other currencies soon floated up against it.

The US gold stock, valued at $35 an ounce, fell from $24.6 billion in 1949 to $10.2 billion in August 1971. As dollars flooded into Europe in May, a Treasury contingency paper dated 8 May 1971 listed "phasing out of gold" among its objectives. On 28 May Connally told bankers in Munich, "We are not going to devalue. We are not going to change the price of gold." By the end of July foreign governments and central banks held about $37 billion in dollar claims, against $13.3 billion of US reserves, and in the first two weeks of August their claims grew by another $4.5 billion.

On 18 December 1971 the US agreed to devalue and raise the official gold price to $38. On 2 March 1973, 18 days after a second devaluation to $42.22, Nixon said "there will not be another devaluation"; later that month the major currencies floated against the dollar, ending fixed exchange rates. In January 1976 Treasury Secretary William Simon told President Ford the new International Monetary Fund deal put gold "on a one-way track out of the monetary system." The official gold price was abolished in 1978, and the window never reopened. The 1973 price, "42 and two-ninths dollars a fine troy ounce," is still in the US Code, and the Treasury carries its roughly 8,100 tonnes of gold at that rate.

After 1971 inflation got much worse. Consumer prices rose 12.3 percent in the year to December 1974 and 14.8 percent in the year to March 1980, and by 2025 the dollar had lost about 87 percent of its 1971 purchasing power. Gold, officially $35 an ounce until 1971, hit a London benchmark price of $850 on 21 January 1980. But prices had already risen 5.5 percent in 1969 and 5.8 percent in 1970, and the Federal Reserve's own history website dates the Great Inflation from 1965. Oil shocks in 1973 and 1979 added to the damage, though the falling dollar after 1971 was one reason oil exporters raised prices.

The phrase "WTF happened in 1971?" comes from a website of about 80 charts, most with a red arrow near 1971. One of its founders has called it a meme and said any chart with an unusual bend in 1971 goes on it. Its lead chart, pay against productivity, puts the arrow at 1973. How big that gap looks depends on whether you count benefits as pay and which inflation measure you use; economists Anna Stansbury and Lawrence Summers find that the rest shows up as wider inequality and a shrinking share of income paid to workers. None of the mainstream explanations runs through gold. The defensible claim is narrower: after August 1971 the dollar was fiat money for everyone, redeemable in nothing, with no outside limit on how many could be issued.

Satoshi Nakamoto did not mention 1971 in the whitepaper or his P2P Foundation forum posts. "The central bank must be trusted not to debase the currency," he wrote there on 11 February 2009, adding that the history of fiat currencies is full of that trust being broken. Bitcoin replaces that trust with an issuance schedule every node checks. The supply schedule covers how it works, and the journey chapter Why Money Is Broken tells the longer story.