The Making of an International Monetary Crisis1
For years the world has been plagued by continuing international monetary crises. Since 1944, the international monetary system has endured dollar shortages and dollar gluts; chronic deficits and chronic surpluses; perpetual parity disequilibria and currency realignments; disruptive “hot money” flights of capita; and numerous controls on the exchange of money and goods.
In 1968 a two-tier gold market was established in the midst of a run on U.S. Treasury gold reserves. In 1971 the two-tier experiment failed in the face of new foreign government demands for dollar convertibility: The United States embargoed gold and allowed the dollar to seek its own level on the free market. In December of 1971, a new agreement was reached—the Smithsonian Agreement—which consisted of multilateral revaluations of most major foreign currencies and a de facto devaluation of the dollar. In 1972 the dollar was officially devalued yet remained nonconvertible into gold.
Meanwhile, only 14 months after the Smithsonian Agreement was reached, the dollar was brought under new selling pressure and was again forced to devalue (a total of almost 20 percent in under two years), and the free market price of gold soared to nearly $100 an ounce, making the official price and the two-tier system look embarrassingly unrealistic.
The most immediate and visible cause of the 1971 international monetary crisis can be traced directly to an excess supply of dollars, ...