Every so often it’s useful to quote arguably the most important passage from Wall Street Journal reporter Craig Karmin’s 2008 book, Biography of the Dollar. Karmin noted that prior to 1971, there “was no need for a foreign exchange market because all major currencies were pegged to a dollar rate and could only be changed in unusual circumstances.”
Implied in Karmin’s passage was that a dollar defined as 1/35th of a gold ounce was quite stable thanks to its peg to the yellow metal. If gold hadn’t been stable, not only would the dollar not have been pegged to it, but it’s useful to point out that there would have been active foreign exchange markets so that the dollar’s instability could be hedged.
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