When Wilson's Labour government devalued in 1967, he was keen to try to impress on voters that this did not really affect them. “This will not affect the Pound in your pocket”, he infamously said. What he meant was that the Pound note in your pocket would still be exchangeable for goods in shops whose price was £1. That was true but trivial.
Suppose that before the devaluation, £1 = F1.10, and after devaluation they are at parity. Now, everything that Britain bought from France, effectively, becomes 10% more expensive (in fact the Pound was devalued by 14%). If, previously, you bought French wine that cost F11, you paid £10 for it, and now it costs you £11. So, in reality, although £11 does buy you £11 of wine, the Pound in your pocket only buys you 90% of what it did before. The value of the Pound has fallen in comparison to these other commodities, even though their own value has not changed. As a result, their price has risen. This is what happens with import price inflation.
It can also be viewed from the opposite direction. Suppose Britain exports cars to France. The price of the car is £1,000, and to buy it, the French importer had to convert F1,100 into £1,000. After devaluation, the price of the car remains £1,000, but, now, the French importer need convert only F1,000 into £1,000. The car now sells, in France, for F1,000, a 10% fall, which is why it becomes more competitive. However, previously, F1,100 came into UK coffers, and could be used to buy F1,100 worth of French wine and so on. Now, to obtain that F1,100 British car workers have to produce 10% more cars, meaning they have to work 10% harder or longer, even though their wages would not rise to match it. That is why all these forms of economic protectionism/nationalism, such as proposed in the AES of the 1970's, or the Mosely Memorandum of the 1930's, represent an attack on workers, in order to protect the interests of the domestic capitalists. The same applies with Brexit and Blue Labour.
In the 1960's, with the price of gold fixed at $35 an ounce, what this meant, superficially, was that each $ contained 1/35 ounces of gold, or, given that they were paper, represented that quantity of gold. In theory, each $ could be exchanged for 1/35 ounces of gold, but the reality was that, in the years following Bretton Woods, the US state had engaged in huge amounts of spending. It embarked on the Korean War, and a huge armaments programme, including the development of the massively expensive arsenal of nuclear weapons and delivery systems. It expanded its military, and established bases in over 80 countries across the globe, engaged in the Vietnam War, its space programme and so on.
At the same time, the living standards of US workers increased significantly, involving it importing large quantities of consumer goods to satisfy it. The US state itself imported large amounts of commodities required for its military, space and infrastructure projects. LBJ also significantly increased the size of the welfare state, as part of his Great Society project, itself requiring the import of foreign commodities.
But, to pay for all this huge spending, the US state simply resorted to printing more $'s, just as MMT proposes as its solution. It acted as though the nominal value of the Dollar was something fixed and inviolate, as though it contained these same fixed particles of value, and so, if the prices of commodities rose, it was because they contained more of these particle, rather than the truth, which was that, by printing more $'s what was actually occurring was that the value represented by these $'s, the amount of social labour-time that each represented, was getting smaller and smaller.
The only commodity whose price did not change in price was gold, whose price remained fixed at $35 an ounce, as institutionally established at Bretton Woods. The US continued to buy goods and services from other countries, required for its expansion, and various wars, militarisation and so on, as though its value was still equal to 1/35 ounces of gold, and, because all other countries' currencies were fixed against the Dollar, it could essentially make all of these other countries pay a large part of the cost of these programmes. It could do that, because, also at Bretton Woods, the Dollar was established as world reserve currency, in place of the Pound. Countries now settled their debts in Dollars, rather than in gold.
But, it was obvious that, eventually, these other countries would baulk at being continually and increasingly robbed blind by US imperialism. France had always been at the forefront of resisting the hegemony of US imperialism in Europe. It resisted in law the Americanisation of French culture, and refused to place its own military and nuclear deterrent under the NATO umbrella. In 1971, De Gaulle demanded that it be allowed to exchange its Dollar holdings for gold at the official price of $35 an ounce. That would have impacted the US economy far more than would have the plan of Auric Goldfinger to sterilise the gold in Fort Knox, by contaminating it by the use of a dirty nuclear bomb.
Nixon could not allow that, and so ended the convertibility of $'s into gold. Indeed, he also made it illegal for US citizens to hold gold bullion. The reason for that was obvious. Whatever the fantasy of the nominal value of the Dollar, its actual value, in relation to gold, was only a fraction of its official value of 1/35 ounces. As a consequence of this action, the world currency system was thrown into chaos, and the system of fixed exchange rates collapsed with it. For a time, it looked as though the world financial system itself could collapse, and no replacement system for fixed exchange rates be found. The fact that it coincided with the end of the post-war, long wave uptrend, with high levels of global inflation, an oil price shock, and so on, contributed to the chaos. It was a fascinating and exciting time for me to begin studying economics. A decade later, in 1980, gold had risen to its nominal peak of $800 an ounce, meaning the $ was reduced to just about 4% of the quantity of gold it theoretically represented in 1971.
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