pansion of world trade and investment.
At the end of the Bretton Woods meeting, the International Monetary Fund (IMF) was established; its articles went into effect at the end of 1945. This agreement was the basis of international monetary system transactions until 1971, and it placed the American dollar at the center of the international monetary system. According to the agreement, the dollar was the only currency which would be directly convertible into gold, which was determined to be worth $35. Other currencies were assigned values in relationship to the dollar, with the British pound equal to $2.40, the French franc set at $0.18, and the West German mark at $0.2732.
The United States Leaves the Gold Standard
During 1958 and 1971, the United States accumulated a deficit of $56 billion, which was financed in part by use of the American gold reserves (which decreased from $24.8 billion to $12.2 billion) and by incurring liabilities to foreign central banks. These liabilities increased during the period from $13.6 billion to $62.2 billion. Foreign banks were willing to take on so many dollars because they were treated a central reserve asset providing liquidity growth to support growing world trade and finance.
By 1971, however, concern was increasing both in foreign banks and in the United States about the large amount of dollars held outside the country. Under Bretton Woods, dollars could be exchanged for gold, but there were more dollars held by foreign banks by the mid-1960s than there was gold left in the Treasury. By 1971, there were only 22 cents of gold for every dollar held by foreign banks.
In August 1971, President Nixon took the bold step of removing the American dollar from the gold standard, meaning that dollars would no longer be converted directly into gold by the American government. There were two immediate results of this action: currencies around the world returned to floating against each...