

System in Crisis (1959-1971)

Part 1 of 7


Conflict &
(1871 - 1944)

Destruction &

(1945 - 1958)
The System
in Crisis
(1959 - 1971)
the System

(1972 - 1981)
Debt &

(1981 - 1989)
Globalization and Integration
(1989 - 1999)

A Growing Economy Needs Growing Liquidity

Destruction and Reconstruction Next-->

Increased trade and interdependence accompanied the stunning economic growth of the 1950s and 1960s:

  • A typical 1960s U.S. telephone required 48 imported materials from 18 different countries.
  • Foreign trade was a matter of economic survival for some nations. In 1960, Britain's imports and exports equaled 43% of its gross domestic product. West Germany's equaled 45%.

The rapid expansion of production and trade in the 1950s and 1960s required a constantly expanding supply of monetary reserves to increase total liquidity. Gold, the primary reserve asset, could not be mined fast enough to meet this demand. As a result, the U.S. dollar, and to a lesser extent, the British pound, were used as reserve assets.

  • By the mid-1960s, a full third of the total market-economy reserves was held in U.S. dollars and British pounds, with the remainder in gold.

Trade Graph


As Good as Gold

How does a national currency like the U.S. dollar become a reserve asset, adding to the world’s total liquidity?

  • The United States runs a balance of payments deficit by spending more money in other countries (buying their products, investing in them, or giving them dollars) than they spend in the United States.
  • The extra dollars are held by the countries’ central banks. The banks do not ask the United States to redeem them for gold or another currency. As long as foreign banks accept and hold dollars as if they were gold, the dollars act as reserves.

How long could the world rely on the United States and the United Kingdom to run balance of payments deficits and supply the necessary additional liquidity? Could the United States and the United Kingdom continue to create more dollars and pounds when their own reserves of gold were gradually declining?

The U.S. dollar fueled the growth of the world's economy, but at a price: inflation at home and reduced gold reserves.


"Too little liquidity could permit a crisis to develop in which most of the world would tend toward economic stagnation and would suffer from declining trade."

Pierre-Paul Schweitzer
Managing Director of the IMF,
November 16, 1964


A Growing Economy Needs Growing Liquidity

and Development

The Foreign Exchange Famine
The Dollar Glut The Incredible Shrinking Gold Supply Searching
for Solutions
Bretton Woods
System Collapses

Destruction and Reconstruction Next-->