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06 June, 2016

Against the Dollar

During the war, US allies in Europe paid Washington for weapons and military equipment with gold. As a result, the US collected the world’s largest gold reserves. In 1938, they reached 13,000 tons. By 1945, they increased to 17,700 tons, and in 1949 to 21,800 tons.

At the time, the US dollar became an equivalent for gold because its exchange rate was tied to the price of gold (one troy ounce of gold was $35). The situation resulted in the Bretton Woods monetary system which made the US dollar a global payment tool and a reserve currency.

But in the 1960s, European and Asian countries restored their economies while the US economy began to slow down. The Bretton Woods system was in crisis. A heavy blow was dealt by French leader Charles de Gaulle.

During his presidency, a number of reforms were implemented in France which boosted the national economy. France issued the new franc, worth 100 old francs and for the first time in many years, France had a stable currency.

De Gaulle did not trust the dollar, describing the American currency as green pieces of paper. In 1965, he said that an international exchange system should be based on gold, not the dollar. He asked Washington to exchange $1.5 billion in cash for gold from French reserves.

Washington started to pressure Paris as its NATO ally. Finally, France withdrew from NATO military programs. During his visit to the US, de Gaulle requested that Washington exchange $750 million for gold. The exchange was made and by the end of 1965, the French held only $800 million in dollars, from the initial $5.5 billion.

Then, the central banks of Japan, Canada and European countries began exchanging dollars for gold in the US. In 1971, Germany exchanged $5 billion and withdrew from the Bretton Woods system. By July, US gold reserves dropped below $10 billion, and on August 15, 1971, President Nixon issued an order making the dollar inconvertible directly to gold.

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