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The dollar was allowed to float freely on foreign exchange markets with no guaranteed price in gold, only to be fixed again at a significantly lower level a year later with the passage of the Gold Reserve Act in January 1934. Markets immediately responded well to the suspension, in the hope that the decline in prices would finally end. [10]
Basic economics also teaches that the money supply shrinks when loans are repaid; [13] [14] however, the money supply will not necessarily decrease depending on the creation of new loans and other effects. Other than loans, investment activities of commercial banks and the Federal Reserve also increase and decrease the money supply. [15]
The period when major central banks focused on targeting the growth of money supply, reflecting monetarist theory, lasted only for a few years, in the US from 1979 to 1982. [16] The money supply is useful as a policy target only if the relationship between money and nominal GDP, and therefore inflation, is stable and predictable.
A banking panic and a collapse in the money supply took place in the United States that was exacerbated by international commitment to the gold standard. [53] [54] [55] Extensive new tariffs and other factors contributed to an extremely deep depression. [56] GDP, industrial production, employment, and prices fell substantially.
The Federal Reserve tightened the money supply and inflation was substantially lower in the 1980s, and hence the value of the U.S. dollar stabilized. [91] Over the thirty-year period from 1981 to 2009, the U.S. dollar lost over half its value. [84]
The Nixon shock was the effect of a series of economic measures, including wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the United States dollar to gold, taken by United States President Richard Nixon on 15th August 1971 in response to increasing inflation.
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The increase in gold reserves increased the money supply, lowering real interest rates which in turn increased investment in durable goods. A year earlier, in 1933, Executive Order 6102 had made it a criminal offense for U.S. citizens to own or trade gold anywhere in the world, with exceptions for some jewelry and collector's coins. These ...