All bow before the almighty US dollar

Urban C. Lehner

Source Link

The dollar is strong and likely to get stronger. Image: DTN files

Back in 1971, the world was suffering from a vast overabundance of dollars. American foreign investment and foreign aid coupled with inflationary US government policies had flooded the world with greenbacks.

At the same time, the world – especially the United States – had too little gold. That was a problem because, unlike today, exchange rates didn’t float freely on markets. The United States was committed to redeeming dollars for gold at $35 an ounce. (Other nations’ currencies were pegged to the dollar at fixed rates.)

Foreigners were desperately trying to redeem dollars for gold or convert them to other currencies. With the US increasingly unable to meet its commitment, speculators anticipated devaluation.

In August of that year, President Richard Nixon addressed the dollar crisis by suspending the dollar’s convertibility into gold.

Despite a subsequent negotiated devaluation, speculators continued to attack the dollar. By 1973, the gold standard and fixed exchange rates were history.

It was during the 1971 devaluation negotiations that Nixon’s Treasury Secretary John Connally made a deliciously cynical comment that is oft-quoted even today. Connally told foreign counterparts that the dollar is “our currency but it’s your problem.”