The Dollar: No Longer As Good As Gold

Abstract

By 1960, the US balance of payments deficits were raising concerns regarding the stability of the international monetary system created at Bretton Woods. If large balance of payments deficits continued to be run and dollars continued to flow from the United States, would the dollar be able to continue serving as the international reserve currency with a value fixed relative to gold? Realizing that the balance of payments deficits reflected the global role of the United States, particularly its overseas military and foreign aid activities as well as the long-term foreign investment of American corporations, neither the Kennedy nor Johnson administrations were interested in developing balance of payments policies which might interfere with the worldwide aims of the nation. Rather a variety of ad hoc measures were taken to reduce dollar outflows, increase dollar inflows and induce foreign countries to continue holding dollars rather than redeeming them for gold. In addition, freer trade policies were advanced under the belief that liberalizing trade would serve to improve the US balance of trade since American goods and American know-how would capture many markets.