Economic Outlook

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Dollars, however, flooded the world through the 1950's, and few seemed to worry about the gold reserves that might leave the U.S. Treasury. But in the early 1960's, the market gold price threatened to go higher than the official $35 an ounce. With the U.S. in the lead, banks agreed to sell gold whenever this happened ... and they were successful as long as world inflation fears abated. However, by the late 1960's, the world assessed the effects of a massive dollar inflation to pay for both the Great Society programs and the Vietnam War. The dollar had clearly become overvalued, and gold's price undervalued.

Britain was the first major nation to violate the fixed-exchange regime by devaluing the pound in November 1967. This caused a large flight into gold, the first of the postwar era. Billions of dollars were spent by central banks in the next four months, trying to force down the market price of' gold. Finally, in March 1968, governments gave up their efforts to control the market.

From March 1968 to August 1971, the political world pretended that the dollar was still convertible, partly because of the moderate lessening of American inflation during the recession of 19691970. But after that brief respite, our printing presses went back into high gear, and by early 1971 astute financial observers began to sense the imminent collapse of the dollar. The outflow of funds from New York to European money markets accelerated, forcing most European currencies hard against their upper ceilings.

Because Germany, in particular, had maintained a low inflation rate, dollars poured into that country, which was forced to buy them in mounting volume ... more than $1 billion on May 3 and 4, 1971 and a further $1 billion during the first 40 minutes of trading on May 5. At that point the German central bank let the value of the mark float. Neighboring countries, afraid of seeing now-homeless dollars careen across their own borders, were quick to join Germany.

On August 6 more than $1 billion in gold and other reserve assets were drained from the U.S. Treasury, and over that next week almost $4 billion fled the country. During the week ending Friday, August 13, the U.S. Treasury borrowed almost $3 billion in foreign currency to try—unsuccessfully—to halt the dollar's decline by buying back dollars with that onloan currency. On August 15, 1971 President Nixon effectively declared international bankruptcy, announcing that no more gold would be given for dollars. There were then absolutely no checks on the ability of the United States to inflate.

Massive runs continued on the dollar, belying Nixon's claim that a dollar separated from gold would "never again be subject to international speculation". Finally, on January 24, 1973 the Swiss government stopped supporting the dollar. Other governments quickly followed. One month later, the entire fixedrate order collapsed.

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