14 - The International Monetary Crisis (1971)

Summary

Introductory Note: In 1971, an international monetary upheaval prevailed. This monetary fluctuation involved the currencies of a number of industrialized countries. Tensions peaked on 15 August 1971, when the United States declared that it was no longer committed to the 1944 agreement with other industrialized countries on the determination of currency exchange rates (Bretton Woods Agreement).

Although this upheaval resulted most immediately in the fluctuation of the currency rates of industrialized countries, its impacts were also felt in developing countries. In the case of Indonesia, the changes in currency exchange rates between the U.S. and several European countries, as well as Japan, could be expected to bring a negative impact to Indonesian exports because those various countries were Indonesia's major export destinations. In order to be able to immediately take appropriate action, the government consistently monitored the latest developments in the world economy. Therefore, the government needed to take appropriate action immediately to prevent negative consequences. In matter of days, the government on 23 August 1971, announced that it would be taking several steps. In order to be able to take appropriate action, the government consistently monitored the latest developments in the world economy. In order to reduce confusion in media reporting and uncertainty in society, the government's timely announcement included an explanation that core economic elements (including the free flow of foreign exchange) remained unchanged.

Among the most vigilant in monitoring international monetary developments was Professor Dr Ali Wardhana, a Minister of Finance for fifteen years (1968–83) and Coordinating Minister for Economics, Finance and Industry for five years (1983–88). He was ever on the alert and always ready to take necessary action. At that time Indonesia was a member of Group 20, which gathered together ministers of finance for both industrial and developing countries. Professor Ali Wardhana was elected chairman of this group.

To deal with the impacts of international monetary volatility, the Government of Indonesia has taken a series of measures to safeguard Indonesia's export growth and simultaneously also safeguarding foreign exchange reserves for the financing of national development.

Since the international monetary crisis of May 1971, with the floating of the currency exchange rates of West Germany and the Netherlands, and the revaluation of some other European currencies, uncertainties have gripped the international monetary system, resulting in a decline in international trade.