Decentering Money: How Congress Barely and Briefly Saved the International Monetary System in 1968

Dror Goldberg, The Open University of Israel

In his January 1968 State of the Union address, President Lyndon Johnson asked Congress to abolish the last legal connection between the dollar and gold – a legal requirement that 25% of Federal Reserve notes be covered by gold. Johnson wanted the $10 billion in gold reserved for that purpose to be reallocated to support a key international commitment: In accordance with the 1944 Bretton Woods Accords, the United States converted all dollars brought to it by foreigners into gold at $35 an ounce. The Treasury barely had enough gold for that commitment because so many paper dollars were printed to fund the Vietnam War. Although Democrats had large majorities in both chambers, the bill passed in March only by a majority of 51% in each chamber. In the Senate, a quarter of members dodged voting, while another quarter voted against party line. Johnson’s biggest problem in passing the bill was the Tet Offensive that occurred during the deliberations. The shocking offensive signaled that the Vietnam War would not end soon and would require much larger military expenditures. It created a revolt in the Democratic Party, empowered the antiwar faction, and made Johnson a lame duck (he would soon quit the presidential race). Support of defecting Republicans was essential in both chambers. In 1968 the United States thus joined the global norm of not holding a gold reserve for its paper money (only Switzerland still had a reserve). This consequential but forgotten event gave a lifeline to the postwar international monetary system, but three years later President Nixon “temporarily suspended” the international gold-dollar convertibility commitment and thus ended the Bretton Woods era. The world’s money would no longer depend on the gold stock of the country that emerged as the economic superpower at the end of World War II.

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 Presented in Session 27. Financial Stability and the Dollar