The Freeman 1972 - The Ludwig von Mises Institute

1972 IN SEARCH OF A NEW MONETARY ORDER 7after World War II, the Bank ofEngland which was holding thegold reserves for more than 60countries, commonly called thepound sterling area, gradually lostits eminent position. It began tohold most of its reserves in U.S. dollarclaims to gold, which made theFederal Reserve System the ultimatereserve bank of the world;thus the gold-exchange standardbecame a de facto gold and dollarstandard. Finally, during the acceleratinginflation and credit expansionof the 1960's in the U.S.,the dollar gradually fell from itsrespected position. Several monetarycrises which triggered worldwidedemands for dollar redemptiongreatly depleted the Americanstock of gold, and createdprecarious payment situations.Altogether, in less than fouryears, we experienced seven currencycrises that foretold the endof the international monetary system.In November, 1967, GreatBritain devalued the pound and anumber of other countries immediatelyfollowed suit. In Marchof 1968, under the pressure ofmassive pound sterling liquidation,the nine-nation gold pool wasabandoned and the two-tier systemadopted. The third crisis occurredin France in May, 1969,when political riots, followed byrapid currency expansion, greatlyweakened the franc which waslater devalued. The fourth crisiserupted in September, 1969, whenmassive dollar conversions to WestGerman marks forced the Germancentral bank to "float" the markand then revalue it upward by 9.3per cent. The·. fifth crisis occurredin March and early April, 1971,when a new flight from the dollarthreatened to inundate severalEuropean central hanks. In a concertedeffort, the U.S. Treasuryand the Export-Import Bank endeavoredto "sop up" the dollarflood. The sixth crisis began inMay, 1971, when a new flow ofdollars into German marks, Swissfrancs, and several other currenciescaused the mark to float anew,the Swiss franc to be revalued upwardby 7.07 per cent, and severalother currencies to be allowed tofloat or be revalued. The seventhand last crisis was of such massiveproportions that PresidentNixon was forced to announce thecollapse of the· old monetary order.Why the Breakdown ofInternational Monetary Relations?What had caused this gradualdeterioration of international monetaryrelations? An understandingof the causes may provide an answerto the dilemma, preventfurther deterioration, and hopefullyfind a cure to all its somberconsequences.The popular. explanation usually