Credibility Begins with a Clear Commitment to Price Stability

In the summer of 1971, the United States suspended the limited convertibility of the dollar for gold. Convertibility had not been operational for some time, except to foreign governments by special arrangement. Nevertheless, with the suspension came the recognition that America had cast aside its last formal commitment to gold convertibility and was now operating on a purely fiat currency. The idea of the dollar first being one-twentieth and then one-thirty-fifth of an ounce of gold, then being “worth” what a dollar would buy, without reference to some more basic standard of value, was a gradual process.