In the previous part of our series, we described what happened to money during World War II. As a result, the Bretton Woods system was created. It strengthened the position of the dollar, but after just a few decades, the world of money was in for another shock. The 1970s. "I directed the Secretary of the Treasury to take all necessary measures to defend the dollar against speculators. I have directed Secretary Connally to temporarily suspend the convertibility of the dollar into gold" - President Richard Nixon announced on TV. It was August 15, 1971. As it turned out, the Bretton Woods system had collapsed. In addition, the simultaneous occurrence of inflation and the oil crisis in the 1970s showed a certain ineffectiveness of Keynesian thought. This became an opportunity for a new school of economics. This one was centered around the University of Chicago. At its head was Milton Friedman. Friedman in 1956 published the book "Studies in the Quantity Theory Money", in which he recalled the economic thoughts forgotten at that time. He did not deny the connection between income and consumption. He introduced the concept of "permanent income" predictable over a long period of time. In the 1970s, the leader of the Chicago school supported the floating of exchange rates. He also introduced into economic thought the "natural rate of unemployment," the minimum level of unemployment that can be maintained without high inflation. To this, Friedman began to analyze history and previous crises. He believed that the Great Depression occurred in 1929 because of errors in monetary policy. These led to too much deflation. There were more people around the Chicago school who were proponents of small budgets and low taxes. They believed that excessive taxation led to "pushing" money out of the economy and lowering the investment rate. The proof was supposed to be the Laffer Curve, which supposedly explained that there is an ideal level of taxes. Excessive payments to the state were supposed to have a negative effect on their collection. This seemed logical. If taxes are too high, people start thinking about how to get around the tax system. Otherwise, they pay the fees without much resistance. The experiments with a higher tax threshold by France a few years ago may be evidence of this. The Chilean economic miracle The popularity of the Chicago school grew. Friedman's students were even asked by General Agostino Pinochet to help reform Chile after the economic collapse that occurred there following the Socialist rule. While working with a dictator who came to power through a coup may have been controversial, Chile's "economic miracle" has become a symbol that Chicago's ideas work. Liberals come to power By 1977, however, the fight against inflation was already on the agenda of the G-7 in London. Two years later, Margaret Thatcher's party won the British election. At that time, the Bank of England raised the interest rate and the reserve requirements, and in 1981 gave up regulating the former. They started to influence the market only through open market operations and reserve requirements. It did not end there. In 1986, the financial sector was deregulated. Similar changes began to take place in the US in 1979, when the Board of Governors of the Fed introduced new, stricter rules for monetary policy. Paul Volcker, governor of the Federal Reserve until 1987, was behind these. From then on, the Fed was to take care to stop excessive monetary expansion. Interest rates were to be set according to market indications. In the spring of 1980, President Jimmy Carter presented his anti-inflationary program. However, his administration was not successful in this area, as Carter had to leave the White House due to electoral defeat (he went down in history as one of the worst US presidents). The new president was Ronald Reagan, whose reign proved to be revolutionary in the economic field. Admittedly, they were sparked by a recession between 1981 and 1982, but this was the bitter and necessary price of trying to save the economy. In 1982. The Fed increased the money supply on the market. At the same time, the authorities reduced taxes and increased spending on armaments (this was necessary because the Cold War with the USSR was still going on), which generated a high deficit. The Fed also kept interest rates high, which caused the dollar to strengthen against other currencies. The latter led other countries to fury. During the G-7 summit in Versailles, the US was attacked for its monetary policy. A year later, the Commission of Ten was formed to solve the interest rate problem. In 1985. The Fed finally lowered interest rates and the dollar's exchange rate fell. CDN. Tags dollar history ronald reagan
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