The monetary system implemented at Bretton Woods in 1944 made the US dollar the centre of the world economic system, with 43 other countries' currencies linked to it via fixed exchange rates. However, once the US government broke its promise to redeem dollars in gold at $35 per ounce on August 15, 1971, expansion of the supply of dollars was no longer constrained, and like many currencies before it, the lack of monetary discipline led to inflation through which the value of the dollar has fallen by about 98%. The “oil shock” of the 1970s led to the introduction of the “petro-dollar” system whereby Saudi Arabia, then the largest oil producer, agreed to accept only US dollars in payment for its oil in exchange for the US government's pledge to defend it. This shored up demand for the fiat US dollar, enabling it to survive until its now approaching endgame.
Top1.1 1971, August 15 – Beginning Of The End
After US President Richard Nixon closed the “gold window” on August 15th 1971, foreign governments could no longer exchange US dollars which they owned for gold at the rate of $35 per ounce, as the US government had guaranteed since 1944. The immediate reason was that the level of the US government’s gold reserves had been falling as foreign countries’ governments increasingly exchanged their dollars for gold, because they were losing confidence in the value of the US dollar due to the rate of inflation increasing. Under the traditional gold standard, losing gold reserves effectively obliged the government to raise interest-rates, thereby making it more attractive for businesses, people and governments to hold liquid assets as currency in bank accounts earning interest, rather than holding gold, which does not earn interest. However, in 1971 President Nixon faced the political calculation that if interest-rates rose before the next election it would reduce his chance of winning, since rising interest-rates raise the cost of loans to businesses and individuals. For this reason there is continual pressure from the business world and the general public to have lower interest-rates – but this can lead to inflation if not sufficiently resisted.
The end of the US dollar’s gold convertibility ended other countries’ obligation to preserve a fixed exchange-rate with the dollar. Instead of this they started to “float” against the dollar in foreign-exchange markets, which now began to grow in scale. Some economists welcomed the opportunity for exchange-rates to be decided by market forces, which they claimed would be more efficient than fixed exchange-rates, enabling countries to tailor their exchange-rate to suit their trade conditions. So, for example, Germany and Japan, which generally have trade surpluses, would see their exchange-rates rise steadily against other countries, while countries with trade deficits, like the USA and UK, would see their exchange-rates decline.