Developed countries around the world began to rapidly lose confidence in the US dollar and the American government’s ability to manage its finances. And the Treasury Department started receiving demands from foreign governments who wanted to redeem their US dollars for gold.
Nixon was in a bind about how to fix the economic mess. And it was Connally– full of Texas swagger (and little else)– who convinced the President to formally end the dollar’s convertibility into gold.
Nixon made the announcement on Sunday night, August 15, 1971, unilaterally ending the “Bretton Woods” international monetary system that had been in place since 1944.
The announcement became known as the “Nixon Shock”. And “shock” is probably the right word. Foreign governments were in a panic; their entire financial system had been snatched away, overnight, without any warning. And politicians don’t tend to handle uncertainty very well.
This is where Connally stepped in yet again to smash foreign governments in the face with their new reality. “The dollar is our currency,” he told his fellow finance ministers in late 1971, “but it’s your problem.”
Connally was essentially pointing out that the rest of the world didn’t have an alternative to the US dollar. Nearly every nation on earth conducted international trade in US dollars. And because they had no other alternative, the US government could do whatever it wanted… including rack up huge deficits and painful inflation.