Question

The gold standard was ended in August 1971, describe the difference in the M1 and M2 before and after this policy was halted. (Use March 1971, August 1971 and October 1971)

Answer 1

In 1960, the United States held $19.4 billion in gold reserves, including $1.6 billion in the IMF. Till 1970, the United States only held $14.5 billion in gold against foreign dollar holdings of $45.7 billion. Adding to the effect, President Nixon's economic policies had gave an enormous contribution towards stagflation. The inflation in the economy reduced the value of the dollar reserves deposited by the soviet union in european banks commonly known as eurodollars. This led to the banks selling their gold assets. The great depression of 1930 is also believed to be a big contributor for halting of policy. Gold is said to have revived the U.S. economy and in return U.S. had to lose its gold reserves. The aftereffect of halting the policy was that the U.S. economy crashed and burned. The dollar after 1971, fell from the Bretton Woods parity of $35/oz. of gold to over $350/oz. There was a devaluaton of 10:1 during the decade. The nation and the world economy was pushed into an intensified stagflationary slump which might have lead to greater problems like hyperinflation, revolution and war. Also after 1971, the economists sitting in federal reserve seemed to ignore the idea of gold reserves and experimenting with the U.S economy.The year 2013, saw finally after 42 years a policy for gold known as yellen gold standard whixh is applicable till date. It has stablized the market with an average of dollar's value v gold as $1250/oz.Hence, the gold standard has proved its pivotal role in maintaining the stability of the Dollar's value vs. Gold.