The value of the convertible dollars became
problematic during the 1960's because of these US deficit problems. 1) President
Johnson's war on poverty: Head Start, Job Corps, Food stamps,
Medicaid, Funded Education, Job training , Direct Food Assistance
and Direct Medical Assistance for about four million poor people.
2) Vietnam War borrowing cost of $500 billion
Countries were unhappy using the U.S. dollar. Why?
The US gold reserve of $30 billion were
already backing much more in existing dollars. and the U.S. government refused to
slow US economic activity to protect the dollar by raising taxes.
International pressure on the dollar created by inflation caused
massive gold outflows. This resulted in the
which severed the dollar link to gold and eventually creating a
floating value for gold and a US fiat
dollar system. A new negotiated gold value for the was needed.
Britain continued to prop up the pound against
a market that clearly wished it to be lower. The currency simply did
not warrant the value that Britain wished it to have, yet successive
Chancellors* refused to allow it to float freely, fearing a sterling
collapse. In 1976, the Chancellor of the Exchequer called in the IMF
to help arrest persistent runs on sterling. On the advice of the
IMF, the Chancellor imposed austerity measures, which reduced
inflation and improved economic performance. The IMF’s loan was
never fully drawn. The pound recovered – but only temporarily.
Against a background of rising unemployment, the famous “Winter of
Discontent” in 1978 sounded the death knell for the Labor government. In 1979, the Conservatives under Margaret Thatcher won the
election. Many feel U.S. debt would cause the US dollar to have the same
To cushion the shock on U.S. exporters, a 10%
surtax on all imports was instituted. Japan soon increased the
Yen's value against the dollar by 7% meaning the US dollar price of
Japanese goods had increased by 17%. Others would be forced to
follow. Eventually individual countries negotiated an increase of
the dollar value of their currencies by 3% to 8% depending on their
US negotiation power. The dollar price of gold was also increased by
9%. So US imports became more expensive by 12% to 17% and import
prices decreased by the same amount. In 1973 the
value of the weaker dollar was set at $42 and then allowed to float
with other currencies. This meant Bretton Woods
Nixon was happy because printing dollars to pay for stuff was now allowed.
No gold needed. Nixon also abolished the
International Monetary Fund’s international capital constraints that
had allowed Arab oil producers to recycle
their petrodollars into New York banks. The global ‘Petrodollar’
was born and would grow as countries with their own currency still
needed dollars to buy
oil. This massive invasion of petro dollars into the US Banking
System would end up in a world economy that really didn't need them.
Deep-Do-Do would result. See
Long Decline-the Great British pound,
Of Debt, Detriment and Exorbitant Privilege