On August 15, 1971, President Richard Nixon went on national television to announce that the United States would no longer convert dollars to gold at the fixed price of $35 per ounce. It was, in his words, a "temporary" measure. It was permanent. With that announcement — delivered without warning to allied governments, in violation of the 1944 Bretton Woods Agreement — Nixon ended the last functioning link between the world's reserve currency and precious metal. The gold standard was over. The world has operated on fully fiat currencies ever since.
To understand what ended in 1971, it is necessary to understand what the gold standard was, what it promised, and what it cost. In its classical form, between approximately 1870 and 1914, the gold standard was an international monetary system in which the major currencies of the industrializing world were each defined as a fixed weight of gold. The British pound was worth 113 grains of gold; the US dollar was worth 23.22 grains; the German mark, the French franc, and the currencies of dozens of other nations were similarly defined. Exchange rates between currencies were therefore fixed: if both the pound and the dollar were defined in gold, the pound-dollar exchange rate was fixed at 4.86 to 1. International trade and investment operated within a system of monetary stability unprecedented in prior history. Capital flowed freely. Trade balances were, in principle, self-correcting: a country running a trade deficit would lose gold, which would contract its money supply, lower its prices, and make its exports more competitive until balance was restored. This was the "price-specie-flow mechanism" described by David Hume in the eighteenth century, and it was the intellectual backbone of gold standard orthodoxy.
The standard worked — imperfectly, with recurrent crises, but as a coordinating mechanism — during the late nineteenth century because the dominant economic powers were committed to it. Primarily, this meant Britain was committed to it. The Bank of England, as the institutional center of the international gold standard, maintained credibility through ruthless deflation when necessary, accepting the domestic unemployment costs of restoring the gold peg. This was the deal embedded in the gold standard: monetary stability purchased at the price of wage and employment flexibility. Workers bore the cost; merchants and creditors received the benefit.
The gold standard's first death came with World War I. Financing a modern industrial war required money creation on a scale incompatible with gold convertibility; all the major belligerents abandoned it within weeks of the war's beginning in 1914. The interwar attempt to restore it (the gold exchange standard of the 1920s) ended catastrophically with the Great Depression. The deflationary logic of the gold standard — which required countries to contract their money supplies and accept unemployment in order to maintain gold parity — transformed the 1929 stock market crash into a decade-long economic catastrophe. The countries that left gold earliest (Britain in 1931, the United States in 1933 domestically) recovered earliest. The causal relationship between gold standard adherence and depression severity was established definitively by economists Barry Eichengreen and Peter Temin: the gold standard was the disease, not the cure.
The Bretton Woods system (1944–1971) was the gold standard's ghost: a system in which only the US dollar was convertible to gold (at $35 per ounce), and all other currencies were pegged to the dollar. It was, as the French economist Jacques Rueff called it, a "gold exchange standard with dollar hegemony." It worked as long as the United States maintained fiscal discipline sufficient to hold the $35 peg credibly. It ceased to work when the costs of the Vietnam War and the Great Society programs expanded the US dollar supply beyond what the US gold reserves could support. The French, under De Gaulle's direction, began converting dollar reserves to gold in the late 1960s, testing the system's credibility. Nixon's August 1971 announcement was the moment the bluff was called.
The end of the gold standard is a canonical case for Law 5 — Revise / Evolution / Transparent Archive. The gold standard was a revision of prior monetary instability: it worked, within limits, for roughly forty years of classical operation. Its archive is the economic history of the late Victorian era — stable prices, expanding trade, capital mobility, but also deflationary crises, banking panics, and the suppression of wage demands in service of monetary orthodoxy. Its failure during the Great Depression left an indelible archive — a record that subsequent monetary policymakers (including Ben Bernanke, who cited it explicitly in his 2002 speech to Milton Friedman) read as the template for what not to do in a financial crisis. The 2008 response — massive monetary expansion, not contraction — was the direct lesson drawn from that archive.
The end of the gold standard also opened the question that remains unresolved today: if money is not anchored to anything physical, what anchors it? The contemporary answer — the credibility of central banks and the productive capacity of economies — is a social construction of considerable sophistication, and considerable fragility. Every monetary innovation since 1971 has been, in some sense, an attempt to answer that question in a world where the old answer has been discarded.