# Why there was inflation before Nixon shock in august 1971 in the US?

As far as I know before August 1971 the US dollar and gold were convertable. Means that every US dollar was backed by some fix amount of gold in the US treasury or central bank (I don't know exactly). Is this assumption correct?

If yes, then I can't understand how the inflation can be possible in such situation. While inflation happens by printing more money. Because the federal reserve or every institution that is responsible of money supply should care about how much gold they have and it prevents them from printing uncontrolled amount of money.

I know that the inflation rate before 1971 was so low compared to now, but I can't grasp the concept of inflation in this condition.

• Your assumption is not correct: there was no link between the dollars in circulation and the gold held, just a promise to other central banks that they could exchange dollars for gold at a fixed rate, largely assuming that they would not do so. When they did ask for large amounts of gold at a time when the free market price was much higher than the fixed rate, this led to the Nixon shock Mar 18 at 8:48

Unfortunately, a gold standard is not a guarantee of price stability. It is simply a promise made “out of thin air” to keep the supply of money anchored to the supply of gold. To consider how tenuous such a promise can be, consider the following example. On April 5, 1933, President Franklin D. Roosevelt ordered all gold coins and certificates of denominations in excess of \$100 turned in for other money by May 1 at a set price of \$20.67 per ounce. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed. In 1934, the government price of gold was increased to \\$35 per ounce, effectively increasing the dollar value of gold on the Federal Reserve’s balance sheet by almost 70 percent. This action allowed the Federal Reserve to increase the money supply by a corresponding amount and, subsequently, led to significant price inflation.