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The Big Float

Summary:
When the US effectively floated the US dollar in 1971, many foresaw the end, or at least the beginning of the end, of the Bretton Woods system and, with it, American monetary and economic hegemony. Yet the dollar-based system survives – along with the same old criticisms of it. BERKELEY – August 15 is not a red-letter day on most calendars. True, August 15, 1969, was the first day of the Woodstock music festival. And the Panama Canal opened to traffic on August 15, 1914. Mostly, though, mid-August finds officials and others on holiday.But not on Sunday, August 15, 1971. That evening 50 years ago, at the conclusion of three days of crisis meetings, President Richard M. Nixon announced that the United States was

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When the US effectively floated the US dollar in 1971, many foresaw the end, or at least the beginning of the end, of the Bretton Woods system and, with it, American monetary and economic hegemony. Yet the dollar-based system survives – along with the same old criticisms of it.

BERKELEY – August 15 is not a red-letter day on most calendars. True, August 15, 1969, was the first day of the Woodstock music festival. And the Panama Canal opened to traffic on August 15, 1914. Mostly, though, mid-August finds officials and others on holiday.

But not on Sunday, August 15, 1971. That evening 50 years ago, at the conclusion of three days of crisis meetings, President Richard M. Nixon announced that the United States was preemptively closing the “gold window,” the financial facility through which the country made gold available to foreign governments and central banks at $35 an ounce. To contemporaries and historians alike, Nixon’s announcement marked the end, or at least the beginning of the end, of the Bretton Woods international monetary and financial system. And that meant it marked the end, or at least the beginning of the end, of American economic and monetary hegemony. The postwar period when the US could all but unilaterally determine the monetary structure and financial fate of the Free World was drawing to a close.

Or was it? What exactly ended with Nixon’s decision? Clearly, it ended the era when the dollar was firmly anchored to gold at a fixed domestic-currency price, and when other currencies were equally firmly anchored to the dollar. Over the subsequent four months, an agreement was reached under which European currencies and the Japanese yen were revalued by an average of 10%, the dollar price of gold was raised from $35 to $38 an ounce, and fluctuation bands surrounding the new exchange-rate parities were widened from +/- 1% to +/- 2.25%. In this way, at least the façade of the Bretton Woods international monetary order was maintained.

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Barry Eichengreen
Barry Eichengreen is Professor of Economics at the University of California, Berkeley; Pitt Professor of American History and Institutions at the University of Cambridge; and a former senior policy adviser at the International Monetary Fund.

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