Forex: The Dollar in the Foreign Exchange
In a dramatic televised speech on August 15th in 1971, President Nixon stunned both the nation and the world by announcing a new economic policy. On the domestic front he unveiled a freeze on wages and most prices, plus some tax changes, designed to check inflation overnight without adding to unemployment.
On the international front he ended one era and began another with a few terse sentences announcing that the value of the U.S. dollar must be changed in terms of other nations' currencies and gold. He soon had his way on the international currency issue. Soon the exchange rates between the dollar and other currencies were drifting towards higher values for other currencies and lower values for the dollar.
Suddenly international travelers, long accustomed to fixed exchange rates between dollars and other currencies, found that their dollars exchanged for fewer German marks, Japanese yen, and other currencies. The change also affected firms and individuals trading goods between countries.
U.S firms such as Boeing found it easier to sell their aircraft and other products abroad now that foreigners felt that they could afford more dollars and more U.S. goods priced in dollars. Foreign firms used to selling large amounts of goods to the United States felt a new kind of pressure. Volkswagen, for instance, found that the same dollar prices for VWs in North America brought it fewer German marks with which to pay German workers and shareholders. hey soon had to raise their car prices in dollars, losing some business to its American and Canadian competitors.
The change brought a different kind of crisis headline to the newspapers. Before August 15th, 1971, the system of keeping fixed rates of exchange between national currencies had been cracking; with increasingly frequent 'balance-of-payments crises'.
Now the headlines began to shift, dropping the usual references to the balance of payments and replacing them with news of rising marks, falling dollars, and wavering pounds.
Officials felt at least as much sense of crisis as before and hurriedly arranged meetings to deal with the new system. Meeting at the Smithsonian Institution in Washington on December 18th in 1971, the governments and central banks of major countries announced an agreement to make the dollar worth less in gold and a few major currencies, and to try to hold fixed the new exchange rates between certain European currencies and the dollar.