Forex: The Dollar Crises
During the past several years, the international monetary system has experienced a series of crises, in most cases related to the value of the dollar's relative to other currencies and/or the dollar's role as a reserve currency in the system.
It is a fact that Americans were able to use the import surcharge and investment tax credit and the consequential European fear of a trade war as a bargaining weapon, successfully, is a hopeful sign of general understanding that the purpose of international monetary arrangements is to facilitate international trade and investment; however and not vice-versa, as individual national actions in the past have frequently suggested. The crises laid the basis for a further movement towards the goal of a liberal international trade and payments system through international trade negotiations.
The 'dollar crisis' of 1971 was the first international monetary crisis since the establishment of the International Monetary Fund to shake the foundations of the international monetary system established by the Bretton Woods Conference of 1944.
The result of the 1971 crisis was to reestablish the preexisting international monetary system of the fixed exchange rates, albeit with a realignment of their relative values intended to a secure international equilibrium for a reasonable period ahead--- though it should be noted that the complete inconvertibility of the American dollar into gold for the foreseeable future meant technically that the International Monetary Fund system ceased to exist, since it rested formally on gold as the base of the international monetary system.
However, the stability which was the goal of the 1971 Smithsonian agreement never came close to being really achieved, as first the pound and then the dollar were subjected to heavy downward pressures in 1972-73. The British were forced to suspend their participation in the Smithsonian agreement in mid-1972, and in early 1973, the U.S. balance-of-payments situation, concern abroad over prospects for continued inflation in the United States, and other developments led finally to a 10 percent devaluation of the dollar in mid-February.
This change, which was coupled with a floating yen, only resulted in new speculative attacks on the dollar and, through the stable exchange rate system, its relationships with other currencies. One month later, six of the Common Market countries (later joined by two outsiders, Sweden and Norway), announced that each of their currencies would be kept in close alignment with the others, none being allowed to vary more than 2.25 percent with respect to another (the range accepted under the Smithsonian agreement); at the same time, the currencies as a group were to float against the dollar.