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@ Bashno
2024-07-06 22:49:47Described as the "biggest theft in history," today's series tells the story of the transformation of the global system from a gold-backed system to one heavily reliant on floating exchange rates: the Nixon Shock.
In July 1944, a crucial conference was held that would be pivotal in shaping the events of our story today: the Bretton Woods Conference. The conference aimed to achieve global financial stability and resulted in the establishment of the International Monetary Fund (IMF). One of the key outcomes of the conference was the provision to fix the exchange rate of the dollar against gold.
In order to establish a unified currency for international transactions, the United States committed to redeeming gold for dollars to any requesting party, as it held the largest global gold reserves at that time, estimated to be two-thirds of the world's gold reserves.
Thus, the dollar became a representation of gold in paper form. As a result, countries accumulated large amounts of dollars in their reserves over the years, strengthening the dollar's centrality among other currencies.
However, due to the costs of the Vietnam War and the inflation it caused in the United States, the US was forced to print more dollars without informing other countries, thus bypassing its ability to maintain the agreed exchange rate under Bretton Woods, which was $35 per ounce of gold.
In August 1971, under the slogan "To create a new prosperity without war," President Richard Nixon announced the end of the conversion of the US dollar into gold, effectively disregarding the Bretton Woods Agreement. Thus, the dollar became simply a fiat currency backed by the strength of the US economy.
It was a major shock on a global scale. Countries faced two choices: either accept the new reality or dispose of the mountains of dollars they had accumulated in their central banks over the past two and a half decades. This forced governments to engage globally with the dollar, and the existing system was replaced with a new floating exchange rate regime governed by supply and demand forces.
Despite the dollar's decline in value against gold since then, with an ounce now worth over $1800, the dollar has proven its centrality and strength among other currencies. Many countries still tie the fate of their currency to the dollar.