A system where foreign countries’ central banks pegged their currency against the U.S. dollar.

U.S. Federal Reserve held the dollar price of gold at a constant $35/oz. to allow for a stable rate of exchange.This allowed foreign central banks to exchange

their dollars for gold.

The U.S. was responsible for holding gold @ $35/oz, but gold supplies were not growing fast enough.

Foreign central banks would hold onto dollars, since they accumulated interest. Good business from an investment point of

view.Dollar represented international money par

excellence

Central Banks and world economic growth trends showed a long-run problem with Bretton Woods. Central banks would stop accumulating dollars.A feared “run on the bank” by foreign banks

would deplete all reserves.

1965-1968 Macroeconomic package Government purchases expanded greatly

Military ( Vietnam) Great Society Programs: public education and

urban redevelopment. Taxes were never raised.

There was no offset to the government spending that occurred.

1966 mid-term election: Pres. Johnson avoided asking for tax increase, for fear of congressional scrutiny on spending.

• Substantial fiscal expansion policy• Sharp fall in current account’s surplus• Rising domestic prices: inflation increased

• Monetary policy• It was contractionary as output expanded• High interest rates caused Fed. to expand its

monetary policy, as a remedy.• Inflation rate was close to 6% per year by the end of

the 60’s

• Speculation of Gold: late 1967 and 1968 The gold bought up on London gold market:

Pushed gold prices up. Caused speculation

Creation of two-tier gold market ( turning point) Private market: gold’s price was allowed to fluctuate Official tier: Central banks kept gold at an official

$35/oz. Link severed

Supply of dollars tied to a fixed market price of gold. Official price of gold became an arbitrary number to

balance accounts between among central banks.

Devaluing the DollarIncrease employmentBalance U.S. current account

Two optionsDepreciate domestic prices, while increase in

foreign pricesOR, depreciate Dollar’s nominal value against

foreign currencies

Option two choosen: depreciating Dollar against foreign currencies.Multilateral agreement would be needed.

Foreign currencies are pegged to Dollar, but Dollar is fixed to gold’s set price.

Many countries were resistant to the ideaHurt their import/export competing industries with

revaluation.Nixon arrangement: August 1971

Ended the selling of gold for Dollars.Last connection to gold.

Imposed 10% tax on imports, until trading partners agreed to revalue their currency.

http://www.nationmaster.com/encyclopedia/U.S.-dollar

International exchange rate agreementSmithsonian Realignment: Dec. 1971

Dollar was devalued against foreign currencies by 8%.The 10% import-surcharge was lifted.Gold was raised to a new official price of $38/oz.

No significance: The U.S. never sold gold for Dollars after this arrangement.

15 months later: Feb. 12, 1973 & Mar. 1, 1973 Speculation attacks against Dollar closed exchange

marketsDollar was devalued 10% more.

Floating exchange ratesMarch 19, 1973: Exchange rates of Japan and most

European countries were floating against the Dollar.A temporary fix that has become permanent solution

for now.