Groupthink and Denial on a Grand Scale
Chapter 4: The ‘snake in the tunnel’ reappears
When President Nixon refused the demands by countries to convert dollars into gold (principally from the UK) on 15 August 1971, the dollar became a non-convertible fiat currency. If all nations had followed suit and floated at that point the world would have been a better place. The unilateral action by the US gave the other nations in the Bretton Woods system three options: (a) fully float their currencies against the US dollar and all other currencies; (b) jointly float against the US dollar, that is, maintain fixed parities between themselves but allow for flexibility against the dollar; or (c) continue to peg to the now non-convertible US dollar. During the mark crisis in May 1971, the Germans had proposed that the EEC Member States arrange a joint float against the US dollar but the French rejected the plan. They were steadfast in their desire to maintain the peg, and used capital controls to reduce the currency fluctuations. The French saw danger in anything resembling a float because it would threaten the subsidies they enjoyed from Germany under the CAP. Before the foreign exchange markets reopened again following the shock announcement by the US to close the gold window and abandon convertibility, the Germans once again proposed a joint float and the French continued their resistance.
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