Question

In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation's currency is based on the strength of that nation's economy — and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.

I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

—Richard Nixon, August 15, 1971
Which of the following statements describes a major cause of the policy shift outlined in the passage?


A.The overvaluation of the U.S. dollar as a result of the Bretton Woods system

B.The collapse of the American gold mining industry due to unsustainable mining practices

C.The refusal of many European countries to exchange U.S. currency for gold

D.The need to increase the supply of U.S. dollars to fund the arms race

Answer 1

The major cause of the policy shift outlined in the passage is A. The overvaluation of the U.S. dollar as a result of the Bretton Woods system.

The Bretton Woods system, established after World War II, tied the value of many major currencies, including the U.S. dollar, to gold. Under this system, the U.S. dollar was considered the reserve currency and other countries could exchange their U.S. dollars for gold.

However, over time, the U.S. dollar became overvalued due to various factors such as increased U.S. spending on the Vietnam War and domestic programs. This overvaluation meant that the U.S. had more dollars in circulation than it had gold reserves to back them up.

To address this issue, President Richard Nixon announced the suspension of the convertibility of the dollar into gold or other reserve assets. This meant that other countries could no longer exchange their U.S. dollars for gold at a fixed rate. Instead, the value of the U.S. dollar became determined by the foreign exchange market.

This policy shift was a major change in the international monetary system and marked the end of the Bretton Woods system. It allowed the U.S. government more flexibility in managing its monetary policy and provided the basis for the floating exchange rate system that exists today.