The Lessons of 1971
Although many Americans might be unaware of this, next year would mark 50 years of the abolition of the Bretton Wood Treaty. In effect, this broke any bonds the US dollar had with the gold standard and moved the US economy towards floating exchange rates.
There were many reasons and consequences for the decision. The decision, made by President Nixon, completely overhauled the global financial system and international trade and its aftereffects are still with us today.
Why Was the Treaty Ended?
The main reason for Nixon revoking the Bretton Woods treaty was the economic situation of the United States. The US had been undergoing extreme inflation during that period. This resulted in wage stagnation and a current account deficit.
The direct international convertibility to gold that other nations enjoyed meant that the US federal government’s hands were tied when it came to government spending and budget planning.
Therefore, in addition to surcharges on imports and price freezes, President Nixon abolished the Bretton Woods treaty and removed any semblance of a gold standard.
Immediately after Nixon’s executive order, the American public embraced Nixon’s actions. Many experts deemed it a political and economic success. The Dow increased almost 35 points the next day, which at that time was the highest ever.
Additionally, by the end of the year, the US increased its imports and decreased its current account deficit.
In 1973, the global financial system, which operated under a fixed-rate exchange system, moved towards a floating rate system. Therefore, this meant that the primary tool for manipulating monetary policy was not exchange rates.
While President Nixon was praised immediately after the executive order, the effects of Nixon’s actions have been mixed. The inflation continued into the 1970s, and the decade was marked with significant economic stagnation.
Furthermore, the floating rate exchange system allowed the development of more effective monetary policies. This meant more freedom to pursue economic policies. However, some states have been criticized for acting as currency manipulators.
Additionally, economists have suggested that Nixon’s actions may have caused less economic growth, not only for the US but also for the rest of the world.
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