The 1973-1979 Dollar
Steven W. Kohlhagen
The decade of the 1970s began and ended with international financial turbulence. The period of floating exchange rates began in March 1973 after a four-year period of exchange-rate crises in response to disequilibrium exchange rates that had built up as a result of increasingly divergent macroeconomic performances across countries. The decade ended in an atmosphere of financial concern about rising worldwide inflation, falling real growth rates, escalating oil prices, and disrupted oil markets. In addition, the international political crises in Iran and Afghanistan at the end of 1979, together with expectations about inflationary pressures, sent the price of gold careening upward in disorderly and disturbed markets as some worried international investors sought refuge from currencies.
A careful examination of the events in the intervening years clearly reveals that floating exchange rates did not solve the underlying international financial problems that led to their adoption. Nor did they completely free countries from the effects of those problems. On the other hand, there is no clear alternative to managed floating for the early 1980s. In fact, many argue that much of the criticism that has been leveled at the current system is due more to a misunderstanding of how the foreign-exchange markets function and what their appropriate role should be than to any systematic failure in market behavior. Nevertheless, there have been frequent claims of disorderly and poorly functioning markets. In this paper the behavior of the U.S. dollar
I have benefited greatly in the writing of this paper from discussions with Morris Goldstein, Peter Hooper, Val Koromzay, Bill Nordhaus, and Ralph Smith. I would also like to thank the Institute of Business and Economic Research, University of California at Berkeley, for its support; Robin Layton for her invaluable research assistance; and several members of the staff of the Federal Reserve Board, especially Pat Decker and Peter Hooper, for their assistance in obtaining the data.