1973 and All That

It’s the “dollar’s worst showing since 1973,” a headline in the Financial Times declares. The greenback’s weakest performance in five decades comes as investors “rethink their exposure to the world’s dominant currency,” the FT reports, making it the “worst first half of the year since the end of the gold-backed Bretton Woods system.” Herewith a short primer on an annus terribilis in which began the long slide of the greenback that is the marker of our economic crisis.Two years before, in 1971, President Nixon had abandoned America’s pledge under Bretton Woods to redeem in gold at the rate of a 35th of an ounce all dollars presented by foreign governments. That ended the greenback’s gold convertibility, which had been a feature of constitutional money since Alexander Hamilton served as the first treasury secretary. Even so, the dollar’s legal weight in gold, and official exchange rates, were left unchanged by Congress.“The intention was to put pressure on other countries to revalue their currencies,” among “other concessions,” Craig Elwell of the Congressional Research Service reports. America “did not officially move to a ‘floating’ rate,” he adds. In the following months, officials pursued efforts to officially devalue, in tandem with other nations, the dollar in terms of gold. In March 1972 Congress set a lower gold value of the dollar at a 38th of an ounce. Yet “there continued to be no convertibility into gold — even for international transactions,” Mr. Elwell reports. The new weight was merely “the official price at which the United States neither sold nor purchased gold.” Even so, it proved “impractical to maintain the new exchange rate,” Mr. Elwell says. In February 1973, Treasury set another devaluation, to a 42.22nd of a gold ounce. That, too, was hard to keep up, per Mr. Elwell, so “the dollar was left to float.”That triggered the dollar’s worst year, until today. The failure in 1973 to return to convertibility, or hold the exchange rate, at a 42.22nd of a gold ounce, rattled currency markets. The Arab oil embargo that year, triggered in part by the abandonment of a gold-backed dollar, didn’t help matters. Yet even though the dollar’s lower gold value “was made official in September 1973,” Mr. Elwell says, that was “long after it had been de facto abandoned.” So by the fall of 1973 the writing was on the wall for the gold-backed dollar, as the greenback’s plunge signaled the onset of the stagflation era. For a few years, the dollar by law retained a weight in gold. In 1976, though, Congress “made official what was already true in reality,” and the dollar’s gold weight “was removed from statute,” Mr. Elwell explains. “The monetary system officially became one of pure fiat money.”That’s the context in which the dollar is, 52 years later, having another bad year. This time, the greenback’s poor showing isn’t measured by a plunge in its gold value, but merely a downward gyration vis-a-vis competing forms of fiat money. Pimco’s Andrew Balls tells the FT there’s still room to fall, raising the prospect of “a significant weakening in the US dollar” even if there is “no big threat to the dollar’s status as the world’s reserve currency.”That’s but small consolation, though, seeing as how the dollar’s reserve role enables the fiscal profligacy that underpins America’s budget and trade deficits. That’s why monetary sage James Grant has described the dollar’s reserve status as a kind of “poisoned chalice.” If the dollar’s weak performance this year is stirring echoes of 1973, it only serves to mark how far the dollar has fallen since the days when it was convertible into gold.

1973 and All That

1973 and All That

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