The international economy is due to “celebrate” the 40-year anniversary of the collapse of the Bretton Woods system of fixed-exchange rates.
On 15 August 1971, the US defaulted on its gold convertibility obligation. Despite a deal to lift the US debt ceiling, the credit downgrade by Standard & Poor’s and the quality of the policy debate and its likely implications suggest that the US may once again steer towards defaulting on its role as an international monetary anchor. The ramifications of possibly prolonged economic policy paralysis in the US are severe but nowhere would its repercussions be felt more than in the international monetary system.
The closing of the gold window by Richard Nixon, then US president, marked a turning point in US international economic commitments and brought to an end the international monetary order that prevailed after the second world war. The decision was meant to alleviate domestic economic hardship. It showed the propensity of the US to take radical steps to support a domestic political agenda. The circumstances today are different and yet the international economy may again suffer the consequences of adverse US domestic economic policy decisions.