Global Shocks: An Investment Guide for Turbulent Markets by Nicholas P Sargen

Part I
Investment Challenges in a High
Inflation Era

2. Bretton Woods’ Collapse Alters the
World of Investing
Nicholas P. Sargen
1
Fort Washington Investment Advisors, Cincinnati, Ohio, USA

One of the landmark developments influencing financial markets in the
post-war era was the shift in the international monetary system from a fixed
to a floating exchange rate regime in the early 1970s. The demise of the
Bretton Woods (BW) system of fixed exchange rates was a milestone event
that marked the end of a prolonged period of low inflation and strong
economic growth in the major industrial countries. It was heralded by
President Nixon’s decision to suspend convertibility between the US dollar
and gold at a fixed price of $35 per ounce in August 1971. The
announcement occurred as I was en route from graduate school at Stanford
University to my first job at the US Treasury Department, and I recall
wondering “Why did he do it?” and “What does it mean?”
The answer to the first question became apparent when I arrived at the
research department of the Office of the Assistant Secretary for
International Affairs that was headed by Paul Volcker. Officials at the US
Treasury, which oversees US exchange rate policy, were concerned that the
USA had a balance of payments problem, as manifested in a steady outflow
of gold and a burgeoning trade deficit that they feared would grow over
time. They hoped that closing the gold window would dampen speculation
on the dollar and that an 8–10 % devaluation of the dollar would restore US
price competitiveness internationally.
These hopes were dashed when pressures on the dollar resurfaced soon
after, amid soaring US and global inflation. The dollar was devalued for a

Global Shocks: An Investment Guide for Turbulent Markets by Nicholas P Sargen