Oil, Private Capital Markets, Inflation: The Tottering of the International Payments System 1968–1973

The chapter argues that the plummeting of the US dollar in international exchange markets and the 1970s inflation in international commodity and capital markets came about way before the 1973 oil price hikes as a result of multiple developments. In addition to the US incapability to reverse the unfettered outflows of short-term capital from the US and the ensuing growing divergence in loan rates between Europe and the US, the weakened fixed exchange rates system that followed the 1967 British pound devaluation, the 1968 international gold crisis, and the Suez crisis, contributed to further plunging the US currency in foreign markets. In turn, such plummeting depressed the value of dollar-denominated international investments. These developments hit the US capital account deficit and fueled the expansion of Eurocurrency markets, hitting the US capital account position way before the first oil shock. The Nixon presidency underestimated such developments and pursued the recasting of the US balance of payments, and the restructuring of a dollar-pegged system of international trade and payments, by tackling the current account deficit. Within this framework, the chapter finally charts the shift in Nixon’s balance of payments deficit financing policy, from foreign military assistance to full support for civilian exports and investments in the largest consuming oil producing economies, and the resulting involvement of the largest US commercial and investment banks..