Edited by Thomas Oatley and W. Kindred Winecoff
Chapter 7: The renminbi-dollar relationship: politics and economics of a diminishing issue
The last few years of strains in US-China relations over the US dollar-renminbi (RMB) exchange rate issue is the third in a post-World War II series of major extended crises involving the dollar. In each case, the United States (US) and its dominant currency have been challenged by rising (or resurgent) economic power elsewhere in the world. The first such crisis occurred in the late 1960s and early 1970s and, in fact, brought about the collapse of the Bretton Woods system of fixed exchange rates based ostensibly on gold, but actually on the status of the dollar as the world's leading currency, widely regarded as being 'as good as gold.' Owing in substantial part to the escalating costs of the Vietnam War and US superpower obligations around the world, the US developed a persistent balance-of-payments problem and its traditional trade surplus eroded into a trade deficit. US dollars held by foreign banks far exceeded the value of US dwindling gold reserves, and there was general speculation that the dollar would have to be devalued. Germany withdrew from the Bretton Woods regime in May 1971, and De Gaulle's France and several other countries started to demand redemption of their dollars in gold. On August 15 President Nixon felt compelled to respond by abruptly ending the convertibility of dollars into gold and imposing a temporary 10 percent surcharge on all imports. Soon thereafter, the dollar was indeed devalued.
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