What happened when we went off the gold standard?

On August 15, 1971, President Nixon ended the convertibility of dollars to gold, effectively ending the Bretton Woods system. This was a crucial moment in monetary history that changed what was possible for US fiscal policy.

Under the gold standard, the government's ability to spend was constrained by its gold reserves because dollars could be exchanged for gold at a fixed rate. If the government created too many dollars, people might demand gold, depleting reserves. This imposed a real financial constraint on government spending.

Once we left the gold standard, the US moved to a fiat currency system. The dollar's value no longer depends on gold backing - it floats freely and is backed by the productive capacity of the American economy and the government's ability to impose taxes payable only in dollars.

This change meant the federal government no longer faced the same financial constraints. It can now create as many dollars as needed, with the real constraint being inflation, not gold reserves. Many economists, including MMT scholars, argue that we haven't fully updated our thinking about government finance to reflect this fundamental change. We still talk about 'fiscal responsibility' as if gold-standard constraints still apply.