Currency War or Compromise?

Abstract

We saw in the last chapter that in 1971 flexible exchanges revived economic nationalism. With his bombshell of 15 August 1971 President Nixon declared currency war and trade war to the rest of the free world. Instead of correcting the overvaluation of the dollar in the usual way, by devaluing it, he forced Governments all over the world to revalue their currencies or allow them to float upward, very much against their will. The alternative was to accumulate even more depreciation-prone dollars which he made completely inconvertible into gold. He refused to meet them halfway by devaluing the dollar at least to some extent. At the same time he imposed protectionist measures in defiance of undertakings given by ratifying GATT and in various other treaties. There was a real danger that this act of financial and commercial aggression might lead to a currency war and a trade war.