DURING the last quarter-century of worldwide turbulence, businessmen, traders and travelers have come to rely on a seemingly immutable fact of life. The U.S. dollar has remained the one major currency with an unquestioned and stable international value. Last week all that changed—perhaps forever.
With shocking swiftness, President Nixon's dollar defense measures knocked the pins out from under the non-Communist world's monetary system. Foreign government leaders, many of whom were on vacation, went scrambling to salvage some order out of the enveloping chaos. Canadian Prime Minister Pierre Trudeau broke off a holiday cruise off Yugoslavia and returned to Ottawa to assess the impact of the Nixon moves. On the French Riviera, French Prime Minister Georges Pompidou cut short his vacation to hurry back to Paris for emergency meetings. In Tokyo, hasty phone calls summoned traveling Japanese Cabinet members back to the job.
The frenetic activity was set off by Nixon's radical moves to sever the dollar from gold and levy a 10% surtax on imports. The former started a worldwide monetary crisis, and the latter threatened to bring forth retaliatory tariffs from all of America's trading partners. With the dollar dethroned as the world's dominant currency, everybody was looking for something that could replace it.
Constellation of Currencies. Washington cut the dollar's tie to gold by serving notice that it will no longer cash in foreign-held dollars for gold bullion held at Fort Knox. Ever since 1944, when the present monetary system was devised at Bretton Woods, N.H., the dollar has had a special and internationally unique relationship to gold. Technically, gold is the asset by which nations pay their debts to one another. But practically, under the rules of the 118-nation International Monetary Fund, which evolved from the Bretton Woods conference, dollars are actually the medium of exchange through which nations settle those debts. The system was made possible by a promise from the U.S. Treasury to redeem dollars for gold at $35 an ounce. Because of that promise, IMF member nations had been assured that whenever they wanted gold in exchange for the dollars that they held as payment of debts, all they had to do was ask the Treasury Department in Washington.
U.S. gold reserves have dwindled steadily as a result of the nation's balance of payments deficits in seven out of the last ten years. When Nixon got a look at the figures for the first six months of this year, he knew that drastic action was necessary. Last week the Department of Commerce released those figures: the U.S. ran a record first-half deficit of $11.6 billion. At that rate, the deficit would be $23 billion by year's end.
Foreigners held three times as many dollars as the U.S. was capable of redeeming in gold, and they were demanding more and more gold because they were losing confidence in the U.S.'s will or ability to whip its economy into order. To prevent a run on Fort Knox, the President thus declared that the nation would no longer exchange dollars for gold.