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BPEA Article

The Trade Effects of the 1971 Currency Realignments


THE YEAR 1971 SAW A MAJOR realignment of exchange rates among the world's important currencies. The basic cause of these changes was the continuing deterioration of the U.S. trade and payments position, and their proximate cause the massives peculation against the dollar throughout the year and suspension of convertibility by the United States in August. The changes in exchange rates against the dollar—the dollar price of foreign currencies—are expected to initiate a major swing toward surplus in the U.S. trade balance and consequently to reduce substantially the surpluses of some other countries. This paper attempts to provide reasonable and consistent estimates of the effects of the realignment on the trade balances of the major countries, based on current knowledge of the theoretical and empirical relationships involved.

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