It wasn’t domestic monetary policy: it was pent up frustration due to industries being uncompetitive internationally. Suppressed inflation didn’t help either. For other countries, it was hovering between fixed exchange rates, capital mobility, and having to revalue currencies in order to help domestic industries (Wellhausen 10-7-14). Then came the issue of the Dollar overhand. The Dollar was the world’s main reserve currency: everything happened in Dollars. By the early 1970’s, the Dollar Overhand equaled too many dollars in the world and not enough Gold in the US. The capital account was in surplus and the current account was in deficit. The US wasn’t bringing in the money necessary to defend the fixed exchange rate, and it was difficult for the Federal Government to intervene in attempts to uphold the exchange rate. Speculative attacks led to choosing one of two things: massive domestics inflation or going off fixed exchange rate (Wellhausen, 10-7-14). All in turn leading to the end of the Bretton Woods System. It was then that the US decided to value the dollar against gold, essentially moving to a floating exchange rate. Governments do not want to adjust by increasing domestic prices. Doing so causes inflation--inflation hurts your constitutions. In 1971, President Nixon bid farewell to the Gold Standard (Wellhausen …show more content…
Supported by the domestic intuitional framework, which details that political outcomes are results of a variation in the “rules of the game,” producers are the ones to benefit from a floating exchange rate. Interests are translated into policy via domestic institutions. For example, Congress and farm subsidies. Individuals are interested in their own well-being. Winners gain by lobbying because they prove better than their opponent. In this framework, the politicians decide based on majority principals and an increased demand for a country’s products. With more money flow, businesses have incentives to increase domestic prices (Wellhausen