World Money Crisis

September 8, 1971

Report Outline
Breakdown of Global Parity System
Development of World Monetary System
Future of Dollar in International Trade
Special Focus

Breakdown of Global Parity System

Nixon's Plan to Bring About Monetary Reform

President nixon's decision to suspend the convertibility of the dollar into gold has launched the world monetary system on uncharted waters. For a quarter-century, the American dollar—which foreign governments could exchange for gold at $35 an ounce—had been the yardstick against which all free world currencies had been measured. Suddenly, it was as if that yardstick had turned to rubber, capable of being expanded or contracted at will. Nixon made it clear that his intention was to prompt “an urgently needed reform” of the rules governing international payments. The President's timing was appropriate. His announcement of the gold embargo on Aug. 15 came just 45 days before the 118-nation International Monetary Fund was scheduled to meet in Washington on Sept. 27. The meeting is being billed as the most important monetary conference since the IMF was created in Bretton Woods, N.H., in 1944. Other important meetings to discuss international monetary problems were scheduled to precede the Washington conference.

Nixon's suspension of the gold-dollar link, as well as his imposition of a temporary 10 per cent surcharge on imports, came as a stunning blow to America's trading partners. The moves prompted complaints that the United States had violated two international treaties—the Bretton Woods Agreement and the General Agreement on Tariffs and Trade. At home, the reaction was generally favorable. Aside from the monetary and trade aspects of the new economic policy announced on national television Aug. 15. Nixon instituted a wage-price freeze and took other actions to combat inflation, speed recovery from the 1970 recession and reduce unemployment—hovering around 6 per cent of the labor force.

Even before Nixon acted, a series of monetary crises, especially since the 1967 devaluation of the British pound, convinced many economists that the system of fixed parities agreed to at Bretton Woods had to be changed. Under that agreement, every currency is “pegged” to the American dollar and can fluctuate only 1 per cent on either side of its fixed value. Experts said the system had now become incapable of responding to gains and losses of economic strength between industrial nations—gains and losses which were reflected in the value of one currency in terms of another. Moreover, maintaining the system required interventions in the money markets by central banks—which frequently had to sell or buy their national currencies in huge amounts to preserve the pegged values. The fact that three major currencies—the German mark, the Dutch guilder and the Canadian dollar—were “floating” without a fixed par value at the time of Nixon's Aug. 15 announcement was evidence that the fixed-parity system was already breaking down.

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