THE EVENTS OF THE PAST TWO YEARS have marked a departure from the
relative stability in international markets since World War II. The difficulties
began with the deterioration in the United States merchandise trade
balance in 1971. Large movements of short-term capital also occurred as
anxiety over the dollar increased. The result was imposition of an import
surcharge and suspension of gold convertibility by the United States on
August 15, 1971. Throughout the fall of 1971, the dollar depreciated on
foreign exchange markets relative to most major currencies. With the
Smithsonian agreement in December 1971, the U.S. import surcharge was
removed and a new set of fixed parities was agreed upon, with wider bands
than had existed previously. In June 1972, a sterling crisis erupted, leading
to a float of the British pound. Even though the monthly trade balance for
the United States improved little in 1972, two events stimulated confidence
in the dollar after the sterling crisis: Late in August, U.S. money market
rates rose significantly, and the efforts of the United States to halt inflation
appeared to be achieving some success while inflation was worsening in
Western Europe.
