A Highly Symbolic Act: Though symbolic, the 1971 changes were a major catalyst for development of the European Monetary Union and the euro.

• Author: Issing, Otmar

To characterize U.S. President Richard Nixon's declaration of August 1971 as a highly symbolic act has two dimensions. "Highly" indicates that the declaration sent a message that had a great influence on international policies around the world. "Symbolic" signals that the effect came not from the substance of the announcement but from a mere change in perception.

Why only symbolic? The declaration of 1971 is widely seen as the end of the gold exchange standard (or gold-dollar system). This characterization of the international monetary system, which ended in 1971, goes back to the International Monetary Fund Statute ratified in 1945. Article IV, 1(a) specified: "The par value of the currency of each member shall be expressed in terms of gold as a common denominator or in terms of the United States dollar of the weight and fineness in effect on July 1, 1944." This established a relation between the dollar and gold at a value of $35 per ounce. What followed in the 1960s were endeavors to preserve the official gold price via arrangements within the "gold pool." But was a gold exchange standard really established in 1945?

The gold standard of the nineteenth century collapsed with the outbreak of World War I. On a global level, the return to gold brought an important modification to the previous system in the form of the gold-exchange standard. Under this regime, countries or in most cases their central banks were allowed to hold their reserves in gold and/or foreign currencies that were pegged to gold. The crucial element of this regime is that it finally allowed money to be converted into gold at a fixed price. This was guaranteed by a fixed exchange rate and a fixed parity between the reserve currency and gold.

Was such a regime established in 1945? Definitely not. No legal obligation to redeem the U.S. dollar at a fixed price was introduced either domestically or internationally. For many years, the United States converted official dollar balances into gold at the price of US$35 on the request of foreign monetary authorities. This was a practice, not a legal obligation. It was obvious that, as foreign dollar reserves rose, this practice would (and must) come to an end. This finally became the official position of the United States in 1971. One major reason it did not happen much earlier was that Germany did not follow French President Charles de Gaulle's attack on the dollar by presenting its much higher dollar reserves to be converted into...