The Great Cookie Jar
WWW Search
The Great Cookie Jar

Table of Contents

Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15


Chapter XIV
The Devaluation of the Dollar

Let us try to explain what “devaluation of the dollar” really means. Actually, the word “currency” should be used in place of the word "dollar." The word "dollar" [p. 150] is the name of the unit we use to express the exchange value of our currency as well as the exchange value of goods and services. The unit, dollar, has no exchange value by itself because it is not a physical thing. It is our currency which has exchange value. Our coins, our United States notes, and our Federal Reserve notes may increase or decrease in exchange value. We do not use dollars as our medium of exchange. We use dollars worth of our currency as our medium of exchange.

Thus, when people speak of a devaluation of the dollar, keep in mind that it is the currency, the exchange value of which is expressed in dollars, that has decreased in exchange value. That exchange value may be less only when it is exchanged for gold. But since our currency is no longer based on gold, it now usually means that our currency has less exchange value when it is exchanged for currencies of other countries.

In the past the word “devaluation” was officially used when the government declared that it would refuse to accept its currency in exchange for gold or that it would accept its currency for gold at a lower exchange value. Another way for the government to say the same thing was to declare that the price of gold was increased.

Nixon Announces Devaluation

On Sunday August 15, 1971, President Richard M. Nixon announced, among other things, that the United States government would no longer exchange foreign held dollars (meaning United States currency) for gold. He said the dollar (meaning United States currency), would be allowed to seek or find its own level. The expression, "we shall let the dollar float," was used.

He, in effect, was admitting that when the United States government was exchanging one ounce of gold for each $35 worth of foreign held United States currency, those who held the currency received the gold at a price which was below the world market price.

And when he said that the dollar would seek or find its [p. 151] own level, it meant that the people who held United States currency in foreign countries could exchange that currency for any other currencies, goods, or services at any rate of exchange they could obtain for it, just as the people in the United States have been doing since 1934. They would be expected to exchange it for the best offer made to them. That is what the statement means that the dollar, meaning the currency, will float or find its own level. The currency could be exchanged for anything, except gold, being offered for sale in the United States at the same rates the residents of the United States receive when they exchange their currency for goods and services.

The Cause of Nixon's Announcement

In 1934 the United States government promised all non-United States residents that it would exchange (buy or sell) 1/35 of an ounce of gold for each one-dollar's worth of United States currency.

By virtue of that promise the United States government gave two exchange values to its currency: One was the general legal tender exchange value given to the currency when it was held by residents of the United States; the other was the additional specific exchange value given to the currency when it was held by non-residents who could exchange each dollar's worth of currency for 1/35 of an ounce of gold.

When a currency has two exchange values, we can expect that the people who possess it will exchange it for the higher value. That is what they did. For a number of years after 1934, very little foreign held United States currency was exchanged for United States gold. Because the price of gold was previously $20.67 per ounce, few were interested in buying it for $35 per ounce. People who bought it for $20.67 were happy to sell it back to the United States for $35. The result was that the United States acquired a large stock of gold.

Beginning about the 1955, however, the price of goods and services, other than gold, increased to such an extent [p. 152] that gold at $35 per ounce became a bargain. In fact, many foreign bankers preferred to exchange their United States currency for gold because gold was their best buy.

Foreign bankers or speculators who owned gold probably believed that the United States government would, in time, raise the price of gold. Therefore, if they could buy the gold at $35 per ounce and later sell it back to the United States for a higher price, they would make an easy profit. But when the world market price was already above our $35 per ounce price, we could no longer sell it for that price.

Because the price of a large percentage of our goods was higher than what the foreigners were willing to pay; because we could no longer sell gold at $35 per ounce; and because foreign bankers held billions of dollars' worth of United States currency for which they still could legally claim gold at $35 per ounce, President Nixon rescinded the 1934 declaration that foreign held U.S. currency could be exchanged for gold at $35 per ounce.

The result was that after August 15, 1971, United States currency held outside of the United States lost one of its exchange values. That is, it lost the exchange value it had as evidence of a claim for gold at $35 per ounce. That is the only exchange value it lost-the same exchange value the currency lost for the residents of the United States in 1934 when President Roosevelt announced that the currency would be exchanged for gold only when it was presented for exchange by foreigners.

After August 15, 1971, the United States currency held by non-United States residents still had all its other exchange values: the currency could be exchanged for stocks, bonds or any other goods or service being offered for sale in the United States.


When international money changers in different countries set a price (rate of exchange) on currencies that are [p. 153] used in international payments, sometimes a currency is given two different exchange value at the same time. When that occurs, speculators attempt to make unearned gains. Such a practice is called arbitrage.

Arbitrage is the simultaneous buying and selling of a foreign currency in the same or different market in order to make a profit. It is usually practiced by large banks and foreign exchange dealers.

Previous pageNext Page

Contact us