Final answer:
In 1971, the US abandoned the gold standard to gain economic flexibility amidst challenges like rising inflation, increased competition from foreign industries, and excessive foreign dollar reserves that threatened gold reserves. This move allowed for the devaluation of the dollar, helping stimulate exports and marking the end of its gold convertibility.
Step-by-step explanation:
The United States abandoned the gold standard in 1971 under President Nixon's administration in response to a financial crisis. Prior to this change, the US dollar was directly exchangeable for a set amount of gold, which anchored the world's economic system. Abandoning the gold standard granted the United States greater flexibility to react to economic challenges. It resulted in inflation and impacted the real wages and standard of living of industrial workers, particularly in the Rust Belt.
The Bretton Woods system, established in 1944, tied the US dollar to gold and made it central to international trade. However, by 1971, American economic policies, including inflationary spending on the Vietnam War and social programs, coupled with the challenge of competitive industrial development in Asia and Western Europe, strained the gold reserves. When the dollar holdings by foreign banks surpassed the US gold reserves, President Nixon decided to let the dollar's value float freely against the price of gold, causing its devaluation and ultimately ending the dollar's gold convertibility.
This momentous decision by Nixon was later ratified by Congress. By the end of the 1970s, no major currency was backed by gold. Although the US no longer operates on the gold standard, it continues to hold a substantial gold reserve.