In 1971, more and more dollars were printed in Washington and then injected abroad to pay for public spending on the military and social programs. In the first six months of 1971, $22 billion in assets fled the United States. In response, Nixon issued Executive Order 11615 on August 15, 1971, pursuant to the Economic Stabilization Act of 1970, which unilaterally carried out a 90-day wage and price control, a 10% increase in imports and most importantly “closed the gold window,” making the dollar directly invertible for gold, except on the free market. Curiously, this decision was made without consultation with members of the international monetary system, or even its own State Department, and was quickly called a Nixon shock. The main instrument used by the Fed to protect gold stocks was the swap network. It was designed to protect U.S. gold stocks by temporarily offering an alternative to the conversion of their dollar inventories into gold by foreign central banks. In the case of a typical swap transaction, the Federal Reserve and a foreign central bank would conduct simultaneous and compensatory spot and currency transactions, usually at the same exchange rate and interest rate. The Federal Reserve`s swap line increased from $900 million to $11.2 billion between March 1962 and the closing of the gold window in August 1971 (see Figure 2 and Bordo et al.
2015) The Bretton Woods rules, set out in the contractual articles of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). a system of fixed exchange rates is foreseen. The rules also aimed to promote an open system by requiring members to convert their respective currencies into other currencies and to free trade. Still on the basis of the experience of the interwar period, American planners developed a concept of economic security – that a liberal international economic system would improve the possibilities for post-war peace. One of those who saw such a security link was Cordell Hull, the U.S. Secretary of State from 1933 to 1944. [Notes 1] Hull believed that the root causes of both world wars were economic discrimination and the trade war. Hull argued As part of the deal, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar. .Back to Blog