The 1970s is when inflation became visible domestically but it had been a problem for the dollar internationally for over a decade. The expansion of the supply of dollars to facilitate its role as world reserve currency after WWII was the cause.
Triffin’s Dilemma:
“Onset during Bretton Woods Era
“Due to money flowing out of the country through the Marshall Plan, U.S. military budget and Americans buying foreign goods, the number of U.S. dollars in circulation began to exceed the amount of gold backing them up in 1959.
“By the autumn of 1960, an ounce of gold could be exchanged for $40 in London, even though the price in the U.S. was $35. This difference showed that investors knew the dollar was overvalued and that time was running out.
“There was a solution to the Triffin dilemma for the U.S.: reduce the number of dollars in circulation by cutting the deficit and raising interest rates to attract dollars back into the country. Both these tactics, however, would drag the U.S. economy into recession.
“To maintain the Bretton Woods system and exert control over the exchange rate of gold, the U.S. initiated the creation of the London Gold Pool and the General Agreements to Borrow (GAB) in 1961 which sustained the system until 1967 when runs on gold and the devaluation of the pound sterling were followed by the demise of the system.
“The Nixon Shock
“In August 1971, President Richard Nixon acknowledged the demise of the Bretton Woods system. He announced that the dollar could no longer be exchanged for gold, which soon became known as the Nixon shock. The “gold window” was closed.
“In order to maintain the Bretton Woods system, the U.S. had to do two things:
“1) run a balance of payments current account deficit to provide liquidity for the conversion of gold into U.S. dollars. With more U.S. dollars in the system the citizens began to speculate, thinking that the U.S. dollar was overvalued. This meant that the U.S. had less gold as people started converting the U.S. dollars to gold and taking it offshore. With less gold in the country there was even more speculation that the U.S. Dollar was overvalued.
“2)run a balance of payments current account surplus to maintain confidence in the U.S. dollar.
“Obviously, the U.S. was faced with a dilemma because it is not possible to run a balance of payments current account deficit and surplus at the same time.