1971 – When Money Became a Political Decision

On 15 August 1971, Richard Nixon appeared before television cameras and announced the suspension of the dollar's convertibility into gold. A temporary measure, he said. Gold convertibility never returned.

Dollar bills did not disappear from people's wallets. Shops continued to open, wages were transferred and bills were paid. Yet behind the everyday use of money, a fundamental condition had changed: the United States would no longer honour its international gold promise.

More than half a century later, Jerome Powell described this turning point. On 2 June 2025, the then Chair of the Federal Reserve said:

“The end of the Bretton Woods era in the 1970s fundamentally changed the conduct of monetary policy”.

Powell was discussing the challenges of more volatile exchange rates. He was neither declaring the abandonment of gold convertibility a mistake nor presenting Bitcoin as the solution. His observation nevertheless leads to a question that extends well beyond the work of central banks: Who determines the rules of the money with which we work, save and plan our future?

Money was political before 1971, too. Rulers had altered coinage, states had devalued currencies and governments had intervened in monetary systems. Political power over money was therefore nothing new. What changed was that ending the dollar's gold convertibility removed an important external constraint on that power.

A promise with a built-in contradiction

The Bretton Woods monetary system placed the dollar at its centre. Other currencies were tied to it through fixed but adjustable exchange rates. The United States promised foreign monetary authorities that dollars could be redeemed for gold at 35 dollars per troy ounce.

For ordinary citizens, this did not mean a general right to exchange dollar bills for gold at a bank counter. The promise operated at the level of the international monetary system. This already created an asymmetry: the United States issued the currency on which other countries depended for their reserves.

As world trade grew, so did demand for dollar reserves. Yet the more dollar claims accumulated abroad, the harder it became to maintain confidence in their convertibility into gold. This contradiction became known as the Triffin dilemma. Supplying the world with additional reserves could undermine precisely the confidence on which those reserves depended.

By the early 1960s, outstanding dollar claims already exceeded American gold holdings at the official exchange rate. Rising US inflation, the Vietnam War and the financing of extensive government programmes intensified the tensions. Anyone who doubted future redemption had an incentive to exchange dollars for gold as early as possible.

Nixon therefore did not end a smoothly functioning system in 1971. The existing order was already under considerable pressure. Defending it would have required difficult economic policy adjustments or a fundamental restructuring. The American government chose to close the gold window.

The countries involved still tried to preserve fixed exchange rates. However, the Smithsonian Agreement of December 1971 failed to deliver lasting stability. In March 1973, the major currencies moved to largely floating exchange rates.

The central lesson is not that every gold promise must inevitably fail. It concerns the distribution of power: the institution that had made the promise could also decide to stop honouring it. The people who lived with that money had to adapt to the new reality.

What the new freedom enabled – and what it cost

Freed from the obligation to redeem dollars for gold at a fixed rate, monetary policy gained room to manoeuvre. This is, in itself, neither a moral achievement nor a moral failure. It changes the possibilities – and the responsibility.

One central argument for central banks is that they can provide liquidity during crises and contain self-reinforcing financial panic. In his speech, Powell also referred to the exceptional measures taken during the financial crisis and the pandemic. In the Federal Reserve's view, they helped stabilise dollar funding and maintain the supply of credit.

This benefit deserves serious consideration. At the same time, nobody can say with certainty how those crises would have unfolded under a different monetary order. Questions about side effects remain equally legitimate: What risks do market participants take when they expect support? Who bears losses? And how do we prevent an exception from becoming a permanent expectation?

It would also be wrong to imagine today's system as one in which central bankers alone determine the entire money supply. Much of our money is created as bank deposits through commercial bank lending. Credit demand, risks, regulation and monetary policy conditions influence this process.

Limits therefore still exist. They simply no longer take the form of a fixed promise to redeem money for gold. They arise from legal requirements, economic conditions and institutional decisions. That is precisely why these rules must remain open to questioning.

A hundred dollars remains a hundred dollars – while losing purchasing power

Imagine someone putting a hundred-dollar bill in a drawer in 1971 and taking it out again in 2025. The bill still bears the same number. Nobody has deducted any money. Yet its owner can buy considerably less with it.

The US Consumer Price Index averaged 40.5 points in 1971 and 321.943 in 2025. This implies a consumer price level almost eight times as high. By this measure, something that cost a hundred dollars in 1971 required approximately 795 dollars in 2025. The stored bill retained around 12.6 per cent of its original purchasing power.

A loss of purchasing power of roughly 87.4 per cent – with its face value unchanged.

This calculation includes neither interest nor income or investment returns. It describes non-interest-bearing money alone. Nor does it prove that the end of Bretton Woods caused the entire change in prices. A development that occurred after 1971 is not necessarily explained by 1971.

For the saver, the experience is real nonetheless. Someone putting money aside wants to carry part of today's work into the future. They forgo consumption now so that they can use those resources later. If purchasing power shrinks in the meantime, the number remains, but some of the possibilities disappear.

Of course, one can invest. But that raises a question with social implications: How much investment knowledge, willingness to take risks and financial flexibility should a person need to preserve the value of their savings over time?

This is not an argument against investment. It is a question about the quality of money as a store of value.

Two per cent is a decision

The European Central Bank aims for inflation of two per cent over the medium term. Its reasons for a positive target include a safety margin against deflation and additional room for monetary policy to act. These considerations are understandable. A slightly positive inflation target can also make adjustments between prices and wages easier when nominal wages are difficult to reduce.

But they do not make two per cent a law of nature.

At a constant annual rate of price increases of two per cent, the price level doubles in approximately 35 years. An unchanged sum of money then buys about half as much. Income and interest earnings can offset this effect; for non-interest-bearing money, it remains.

Most people have never personally agreed to this particular rule. That does not automatically make it democratically illegitimate. Other public decisions are also made through institutions and legal mandates. But precisely because the monetary order affects everyone, the debate must not be left to expert committees alone.

We regularly discuss whether inflation is too high. We speak less often about why a rising price level over the long term should be the objective at all – and what costs the alternatives would entail.

New money meets unequal starting positions

Money does not enter the economy everywhere at the same time. A new business loan has different effects from a mortgage, and a government transfer differs from a securities purchase. Government spending does not automatically create money; how it is financed matters, too.

The idea associated with Richard Cantillon is that the entry point and sequence of additional monetary flows matter. Prices and incomes do not adjust simultaneously. Those who receive additional funds earlier may be able to buy at prices that only change later.

However, this does not imply a simple rule that every monetary easing exclusively benefits the wealthy. Rising asset prices can favour existing owners. A stabilised economy and lower unemployment can also help people on low incomes. Both effects can occur together.

For someone who owns a home, rising house prices mean something different than they do for someone saving for a deposit. That is why looking only at economy-wide averages is insufficient. It also matters who has which opportunities to adapt to changing conditions.

The question, then, is not only whether monetary policy works. It is also: For whom does it work, in what way – and who bears the costs?

Bitcoin changes the question of who decides

In 2009, Bitcoin introduced a digital payment system without a central issuer. Its fundamental approach was to have transactions verified by an open network rather than leaving their validity exclusively to a trusted intermediary.

For the debate about monetary rules, the issuance of new bitcoin is particularly interesting. Under the current consensus rules, the total supply remains limited to just under 21 million. The block subsidy halves every 210,000 blocks, approximately every four years.

No central bank committee can increase that issuance in response to a recession. A president cannot decree that all Bitcoin users must henceforth accept a supply cap twice as high.

This does not mean software is immutable. Anyone can propose different rules or publish programs implementing them. Other participants, however, do not have to adopt those changes. A fully validating Bitcoin node rejects blocks that violate its rules. A different supply rule can therefore produce a separate network instead of simply rewriting the existing one.

The distinction is not that nobody is allowed to propose changes. It is that no single institution can order the entire network to adopt them.

This is not a vote based on “one node, one vote”. Economic influence, technical dependencies and conflicts of interest exist in Bitcoin, too. Nevertheless, the ability to verify rules independently and reject changes alters the position of the individual participant.

Trust does not disappear – it shifts

Under Bretton Woods, the gold promise ultimately depended on American institutions' willingness to honour it. With Bitcoin, compliance with issuance rules can be checked using one's own software. But this does not create a world without trust either.

Anyone unable to assess the code themselves relies partly on the work of others. Anyone who holds bitcoin with a service provider trusts that provider's handling of the assets. And even correctly functioning technology does not guarantee that other people will demand bitcoin in the future.

Limited issuance must therefore be distinguished from stable purchasing power. Scarcity alone does not create reliable demand. Those who hold bitcoin bear substantial price risks and also depend on its future use.

Nor does a fixed money supply eliminate credit or the possibility of financial crises. People can still borrow, misjudge risks and make promises to pay. A limited monetary base does not automatically limit all the claims built upon it.

The convincing comparison is therefore not between flawed institutions on one side and perfect technology on the other. It asks: What dependencies arise in each system, which rules can I verify, and what risks am I prepared to bear?

An alternative must be open about its trade-offs

Using Bitcoin as an everyday currency worldwide makes different demands from holding it over the long term. People must be able to receive payments reliably, protect their keys and cope with price fluctuations. The Lightning Network provides additional ways to make payments, but brings its own requirements for liquidity, usability and infrastructure.

Simpler access through service providers can lower barriers. At the same time, it often reintroduces dependencies on intermediaries. A slogan cannot resolve this tension.

The absence of central crisis management is also a deliberate trade-off. Anyone seeking to remove issuance from political influence gives up precisely the flexibility that supporters of central banks consider valuable. The costs of that choice do not disappear simply because one prefers the underlying rules.

Bitcoin's significance therefore lies, first of all, in the possibility of choice. Nobody has to consider it a perfect system to recognise that a verifiable alternative changes the discussion. Institutions then have to do more than explain their monetary order. They must justify its advantages over other rules.

Money is too important for its rules to go unquestioned

1971 was neither the birth of political power over money nor an event that explains every subsequent economic problem. It was the breaking of a central promise within an already unstable monetary order. Those responsible changed the rules because, under the conditions of the time, they were unwilling or unable to maintain the existing commitment.

2009 opened up a different possibility: a digital monetary system whose issuance rules can be enforced by a decentralised network. This provides no guarantee of success. But it raises a new question about who gets to decide.

We do not first have to decide whether Bitcoin will one day replace every state currency. We can already discuss whether people should be able to choose between different monetary rules – and whether the ability to move to an alternative also disciplines those who manage established money.

We work across borders, sell digital services worldwide and exchange information in seconds. It is understandable that, in doing so, we also look for money whose fundamental rules do not depend on a single national institution.

The decisive lesson of 1971 is a question of power: Who can change a monetary promise when keeping it becomes inconvenient? Bitcoin does not solve every economic problem. But it makes a different distribution of that power possible.

Money is stored possibility: for the next purchase, a journey, an education or a measure of independence. Its rules therefore concern everyone who works for it. We should not leave them exclusively to those who manage the existing system.

This article contains economic and monetary policy analysis as well as personal opinions. It does not constitute financial or investment advice.