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The Great Inflation — 1971 to 1982 · 2 of 11

The End of Bretton Woods

Explain what governments tried to build after fixed exchange rates broke down, why it failed, and what the Jamaica agreement put in place instead.

Before you start

What you'll be able to answer

  1. What did governments try to build after fixed rates broke down, and why did it fail?
  2. What did the Jamaica agreement of 1976 decide?
  3. Was a designed system put in place of Bretton Woods?

Where this sits

The Great Inflation — 1971 to 1982 · this module is lit

  1. 15 Aug 1971The United States stops turning dollars into gold, freezes wages and prices, and puts a tax on imports
  2. Dec 1971–Mar 1973New fixed rates are agreed in December 1971, with the dollar devalued against gold; they break down, and by March 1973 the main currencies float
  3. 1972Food and commodity prices start to climb, while consumer prices across the rich world are already rising
  4. Oct 1973Arab oil producers embargo shipments to the United States and the Netherlands
  5. 1974Imported crude costs American refiners more than three times its 1973 price; the oil exporters' surplus grows more than tenfold; in America inflation and unemployment rise together
  6. Jan 1976Jamaica: each country may choose its exchange-rate arrangement; gold is to lose its official price
  7. 1979Iran's revolution cuts its oil production, and the oil price rises a second time
  8. Oct 1979The Federal Reserve raises its discount rate, and most of the other countries the series follows raise an official rate within two months
  9. 1982Bank lending to developing countries halves, and a debt crisis begins
  10. 1983Inflation is below its peak in all eleven countries the series follows

Tokyo stayed open after Nixon's broadcast

In the week after Nixon stopped swapping dollars for gold on 15 August 1971, Europe's currency markets stayed shut. Tokyo's stayed open. Dealers were sure that the Japanese yen would soon be raised in value against the dollar, and Japan was still promising to hold the yen at its fixed rate. Anyone holding dollars could sell them in Tokyo at that rate before the yen went up.

Predict first

Dealers rushed to sell dollars in Tokyo at the fixed rate. What did the Bank of Japan do?

Japan had a rise in the yen forced on it

To keep the yen at its fixed rate, the Bank of Japan had to buy every dollar offered, paying in yen. The dollars went into Japan's official reserves, the foreign currency and gold a government holds to make payments abroad and to support its currency. Those reserves rose by $4.4 billion in August. On 28 August Japan stopped holding the yen to its old range, and the yen rose at once. By the end of September it was 7.5 per cent above its old fixed rate, so each dollar Japan had bought was now worth fewer yen than it had paid.