In: Categories » Legal and finance » Historical facts » Dollar Crisis of 1971
|
In August 1971 the United States government suspended the convertibility of dollars into gold for foreign official holders of dollars, marking the final break with the gold standard in the world economy. Uneasiness about the dollar reached crisis levels in 1971 as the rest of the world became increasingly aware that the United States did not own enough gold to redeem all the foreign-owned dollars. The drain on its gold reserves also concerned the United States government. Before the suspension, foreign official holders of dollars (foreign central banks and foreign governments) had been able to convert dollars into gold at the rate of $35 per ounce. (Domestic holders of dollars had been unable to convert dollars into gold since the 1930s.) Gold has remained an important component of international monetary reserves, but currencies are no longer convertible in gold at a fixed, official rate. The Bretton Woods System, created in 1944, established a world gold standard for international purposes, requiring each country to define a par value of its currency in terms of a fixed weight of gold. A shortage of world gold reserves, however, led countries to define domestic currencies in terms of United States dollars, and the United States stood ready to redeem dollars into gold at the official rate for foreign official holders. The redemption of dollars into gold drained the United States gold stock from $25 billion in 1949 to $12 billion in the early 1970s. Largely because of worldwide military and political obligations, the United States ran what are called balance of payments deficits after World War II, infusing additional dollars into a world economy hungry for monetary reserves. A balance of payments deficit occurs when the outflow of dollars from U.S. imports and investment abroad exceeds the inflow of dollars from U.S. exports and foreign investment in the United States. The consequence in 1971 was an increase in the number of foreign-owned dollars that the United States was committed to redeeming in gold. After the mid-1960s, the U.S. balance of payments deficits grew at a faster tempo because of military involvement in Vietnam and heavy investment abroad. The rest of the world saw that the United States gold stock was insufficient to redeem all foreign-held dollars in gold. In August 1971 President Nixon announced that the United States would no longer convert dollars into gold for foreign official holders. Between August 1971 and May 1973 world governments endeavored, without success, to save the Bretton Woods System with a dollar devalued in terms of gold. After 1973 the value of the dollar was no longer defined in terms of a fixed weight of gold, and other currencies were no longer defined in terms of dollars. The exchange rates between currencies floated freely and were based upon supply and demand. Today governments manage the floating exchange rates, but currencies are not tied to each other in fixed exchange rates. Historically, the suspension of convertibility of paper money into precious metal has occurred during wartime—the Civil War and the War of 1812 being prime examples in the United States. The suspension of the convertibility of the dollar in 1971 occurred when the United States was engaged in an expensive cold war with the Soviet Union, coupled with a lengthy effort in Vietnam. Some observers attribute the inflation of the 1970s to the collapse of the gold standard, and the loss of the discipline that the gold standard had imposed on monetary growth. As control over monetary growth brought inflation down in the 1980s, however, a connection between the gold standard and price stability seemed less necessary.
|
legal disclaimer
1) Our website is not responsible for the information contained by this article as well for any and all copyright infringements by authors and writers. E-articles is a free information resource. If you suspect this article for any copyright infringements, please read the Terms of service and contact us to investigate the problem.
2) The E-articles directory team is not responsible for inaccuracies, falsehoods, or any other types of misinformation this tutorial may contain and will not be liable for any loss or damage suffered by a user through the user's reliance on the information gained here. Please read the Terms of service
Useful tools and features
If you like this article (tutorial), please link to it from your web page using the information above. Linking to this page, this is the only way to help us improve our service, the same time providing your visitors with a way to improve their online experience.
related articles
The Federal Reserve System is the central banking system for the United States, established by the Federal Reserve Act of 1913. Most countries have only one central bank, such as the Bank of England, or Germany’s Bundesbank. The Federal Reserve System makes up a system of 12 regional central banks. Central banks are bankers’ banks, holding deposits of commercial banks, making loans to commercial banks, and serving as lenders of last resort to commercial banks in an economic downturn. The Federal Reserve System also ac...
2. Suffolk System
The Suffolk System was the first effort to regulate private banking in the United States. Although banking regulation later became a government activity, the Suffolk System was born of a private initiative that saw a need to regulate country banks. The Suffolk Bank of Boston first established the Suffolk System in 1819 and in 1824 six other Boston banks joined the system. The Suffolk System required country banks around Boston to deposit reserve balances totaling $5,000 in one or more of the seven Boston banks participati...
3. What represent the Treasury Notes
Treasury notes were interest-bearing treasury bonds that circulated as money in the pre–Civil War era in the United States. The notes were not legal tender but were accepted for payments owed the federal government, including tax obligations. For the first two decades of its existence the new government of the United States steered clear of the issuance of government notes that circulated as money. The hyperinflation of the American Revolution remained a thought-provoking memory of the dangers of paper money, and Al...
4. Augustan Monetary System
Augustus, Roman emperor from 30 b.c. to a.d. 14—the first emperor after the fall of the Roman Republic, established a monetary system that provided a degree of monetary order to the Romans for two centuries. The system gradually gave ground to currency debasement and inflation, which grew to unbearable proportions during the third century a.d., when the emperors Aurelian, Diocletian, and Constantine instituted major reforms of the Roman currency. The early Roman Republic adopted a bronze monetary standard, but wars ...
Under a gold standard, the value of a unit of currency, such as a dollar, is defined in terms of a fixed weight of gold and bank notes or other paper money are convertible into gold accordingly. Although the monetary systems of individual countries have been based on the gold standard at times, all the economically advanced countries of the world were on the gold standard for a relatively brief time—roughly from 1870 to 1914, sometimes called the period of the classic gold standard. The coinage of gold dates back to 7...
6. Postage Stamps
Postage stamps have served as money in areas as diverse as America, Europe, and the Far East. During the American Civil War merchants, struggling with a shortage of small coins, began the practice of making small change with postage stamps. Daily purchases of stamps increased fivefold in New York City alone, and individual stamps circulated until they became too dirty and tattered for recognition. John Gault, a Boston sewing-machine salesman, proposed the encasement of stamps in circular metal discs with transparent mica on one...
7. What were The Lombard Banks
Lombard banks were banks that accepted deposits of goods and issued credits on account. These credits could pass from one person’s account to another’s as a medium of exchange. The term Lombard probably came from the importance of Italian bankers in the early history of the London financial market, sometimes referred to as Lombard Street, just as Wall Street signifies the financial center of New York. In early English history, Lombard was another name for “Italian.” According to Webster&rsquo...
8. Second Bank of the United States
The Second Bank of the United States met the need for a central bank in the United States between 1816 and 1836. During the War of 1812 state banks suspended the conversion of bank notes into specie. At that time each bank issued its own paper money and held specie (gold and silver coins) to redeem its paper money. Today banks issue checking accounts and hold paper money to redeem the checking accounts. When the banks suspended specie payments in 1814, six months before the war ended, the federal government had no way to pressu...
9. Gold
Gold, the most enduring, highly valued, and universally accepted monetary metal, is a chemical element represented by the symbol “Au” on the periodic table. A lustrous yellow metal, soft and malleable, gold does not tarnish or corrode, and is found in nature in a relatively pure form. From earliest times up to the present, the search for gold in nature has remained a never-ending quest. Man’s earliest chemical researches were inspired by a desire to find a means of converting other metals into gold. Beca...