principle of international finance and monetary policy for almost two
centuries was summarily dismissed as a relic of incorrect thinking.
Despite the removal of gold backing, the United States continued to
redeem gold at $35 an ounce for foreign central banks, although indi-
viduals were paying over $40 in the private markets. Seeing that the end
of this exchange option was near, foreign central banks accelerated their
exchange of dollars for gold. The United States, which held almost $30
billion of gold at the end of World War II, was left with $11 billion by the
summer of 1971, and hundreds of millions more were being withdrawn
each month.
Something dramatic had to happen. On August 15, 1971, President
Nixon, in one of the most extraordinary actions since Roosevelt’s 1933
declaration of a Bank Holiday, announced the “New Economic Policy”:
Freezing wages and prices and closing the “gold window” that was en-
abling foreigners to exchange U.S. currency for gold. The link of gold to
money was permanently—and irrevocably—broken.
Although conservatives were shocked at that action, few investors
shed a tear for the gold standard. The stock market responded enthusi-
astically to Nixon’s announcement, which was also coupled with wage
and price controls and higher tariffs, by jumping almost 4 percent on
record volume. But this should not have surprised those who studied
history. Suspensions of the gold standard and devaluations of currencies
have witnessed some of the most dramatic stock market rallies in his-
tory. Investors agreed that gold was a monetary relic.
POSTGOLD MONETARY POLICY
With the dismantling of the gold standard, there was no longer any con-
straint on monetary expansion, either in the United States or in foreign
countries. The first inflationary oil shock from 1973 to 1974 caught most
of the industrialized countries off guard, and all suffered significantly
higher inflation as governments vainly attempted to offset falling output
by expanding the money supply.
Because of the inflationary policies of the Federal Reserve, the
U.S. Congress tried to control monetary expansion by passing a con-
gressional resolution in 1975 that obliged the central bank to announce
monetary growth targets. Three years later, Congress passed the
Humphrey-Hawkins Act, which forced the Fed to testify on monetary
policy before Congress twice annually and establish monetary targets. It
was the first time since the passage of the Federal Reserve Act that Con-
gress instructed the central bank to take the control of the stock of
194 PART 3 How the Economic Environment Impacts Stocks