Fixed exchange rates, 1945-1973

The currency arrangement negotiated at Bretton Woods and monitored by the IMF worked fairly well during the post-World War II period of reconstruction and rapid growth in world trade.However, widely diverging national monetary and fiscal policies, differential rates of inflation, and various unexpected external shocks eventually resulted in the systems demise.The US dollar was the main reserve currency held by central banks and was the key to the web of exchange rate values.Unfortunately, the United States ran persistent and growing deficits in its balance of payments.A heavy capital outflow of dollars was required to finance these deficits and to meet the growing demand for dollars from investors and businesses.Eventually, the heavy overhang of dollars held by foreigners resulted in a lack of confidence in the ability of the United States to meet its commitment to convert dollars to gold.

This lack of confidence forced President Richard Nixon to suspend official purchases or sales of gold by the US Treasury on August 15, 1971, after the United States suffered outflows of roughly one-third of its official gold reserves in the first seven months of the year.Exchange rates of most of the leading trading countries were allowed to float in relation to the dollar and thus indirectly in relation to gold.By the end of 1971, most of the major trading currencies had appreciated vis-a-vis the dollar.This change was—in effect—a devaluation of the dollar.

A year and a half later, the US dollar once again came under attack, thereby forcing a second devaluation on February 12, 1973; this time by l0％ to $42.22 per ounce of gold.By late February 1973, a fixed-rate system no longer appeared feasible given the speculative flows of currencies.The major foreign exchange markets were actually closed for several weeks in March 1973.When they reopened, most currencies were allowed to float to levels determined by market forces.Par values were left unchanged.The dollar floated downward an average of another l0％ by June 1973.