A First Ever Default? Closing the Gold Window, Forty Years On
Posted By Gerald Epstein On August 15, 2011 @ 11:00 am
During the recent “Debt Ceiling” debacle, many warned that the failure to lift the debt ceiling would lead to a “first ever” US default and to numerous financial catastrophes, including the demise of the U.S. dollar as the world’s reserve currency.
“First Ever Default?” Think again.
Forty years ago this month, on August 15, 1971, President Nixon “closed the gold window”, refusing to let foreign central banks redeem their dollars for gold, facilitating the devaluation of the U.S dollar which had been fixed relative to gold for almost thirty years. While not strictly a default on a US debt obligation, by closing the gold window the US government abrogated a financial commitment it had made to the rest of the world at the Bretton Woods Conference in 1944 that set up the post-war monetary system. At Bretton Woods, the United States had promised to redeem any and all U.S. dollars held by foreigners – later limited to just foreign central banks — for $35 dollars an ounce. This promise explains why the Bretton Woods monetary system was called a “gold exchange standard” and why many believed the US dollar to be “as good as gold”. When Nixon refused to let foreign central banks turn in their dollars for gold, and encouraged the devaluation of the dollar which reduced the value of foreign central bank holdings of dollars, the Nixon administration effectively “defaulted” on the United States’ long-standing obligations ending once and for all the Bretton Woods System. (See the useful history by Benjamin Cohen and Fred Block’s masterful history of Bretton Woods, The International Economic Disorder published University of California, Berkley Press.)
The move by Nixon was designed to restore US competitiveness that had been harmed by the reconstruction of Europe and Japan in the decades following the Second World War, and to improve his re-election chances by increasing employment, profits and exports. By the cunning of history, though, while the Nixon “default” was designed to restart the American manufacturing machine, instead it set into motion the forces that would lead to the dominance of finance, the hollowing out of American manufacturing, the massive destruction of decent employment — and eventually to the Crash of 2008.
The dominance of finance resulted from the dramatic political and economic changes engendered by, as Naomi Klein puts it, the rise of disaster capitalism, which took a very specific financial form. The oil “shocks” and stagflation of the 1970’s brought about the rise of Volckerism, Thatcherism and Reaganism, leading to the policies of sky high interest rates, which undermined the New Deal structures of finance. The extraordinarily high and unstable interest rates created enormous need for new hedging instruments and opportunities for new speculative financial practices. They also imposed enormous losses on financial institutions and financial elites. But the rentiers and financiers did not just sit there and take it: they fought back (see Gerald Epstein and Arjun Jayadev in Financialization and the World Economy) and pushed for financial de-regulation to let them compete in the new environment. One financial crisis led to another, from the third world debt crisis to Long Term Capital Management. After each crisis, finance pushed for more bail-outs and more financial de-regulation and won.
All this led to the acceptance of the de-regulation of finance and the push for international capital mobility by banks and multinational corporations while breaking the power of unions. (See Joel Rogers and Thomas Ferguson, Right Turn and Ilene Grabel’s work on capital controls.) More acceptance of capital mobility led eventually to the off-shoring of manufacturing and, with manufacturing decimated, to the dominance of financial activity and profits back home in the U.S. and UK. Clinton and the Democrats cashed in by becoming the party of financial de-regulation both in the U.S. and abroad. (See Robert Pollin’s The Contours of Descent) The financial markets exploded domestically and internationally. We now know where this led in 2007 – 2008.
Many of us thought that the Nixon default of August 15, 1971 and the decline of the U.S. as a manufacturing and trading nation would lead to the demise of the international role of the dollar. But we didn’t anticipate that the explosion of dollar based international finance and the domination by U.S. led global finance would keep the demand for dollar dominated transactions and assets so high. We also didn’t anticipate that Nixon’s visit to China, together with this dollar based financialization would create a co-dependency between Chinese export-led growth, with the help of U.S. multinational corporations, that would maintain the massive demand for dollar assets even as it further hollowed out working class jobs and incomes in the U.S. Almost thirty years ago I asked if the world economy could thrive with a declining currency at its base (see “Triple Debt Crisis”, World Policy Journal). We now know that the answer is no: In the end, the Nixon “default” did not destroy the international role of the dollar. The rise of American financiers and their counter-parts abroad saved the US dollar – but only by starving the US economy of good jobs and by almost destroying the global financial system.
Forty years ago today Nixon “defaulted” and “liberated” the dollar from gold in a wrong-headed, nationalistic and failed attempt to restore American prosperity. Today we need to join forces with others at home and abroad to liberate our political systems from the financial forces unleashed by that move, and turn back those pushing for more and more austerity – social defaults on pensions, medical care and obligations to our youth in the service of lining the pockets of the rich and powerful. Instead, we must push for reaffirming these social commitments and, if necessary, “adjust” the bottom lines of the elites who have been saved from default by the taxpayers’ largess.
Today we need to join forces with others at home and abroad to liberate our political systems from the financial forces unleashed by that move, and turn back those pushing for more and more austerity – social defaults on pensions, medical care and obligations to our youth in the service of lining the pockets of the rich and powerful. Instead, we must push for reaffirming these social commitments and, if necessary, “adjust” the bottom lines of the elites who have been saved from default by the taxpayers’ largess.
Please refrain from posting sensible stuff, it jars me.
Let's make it very clear: The primary use of gold is for people to decorate themselves. If anyone were to suggest that our monetary system should be based on the fashion sense of either anorexic bimbos or teenage punks wearing their pants around their ankles , we would immediately brand them insane. Yet when we base a monetary system on an element whose principal use is jewelry, we're expected to believe that this makes excellent financial sense.
Remember that value isn't based solely on scarcity, but also desirability. There is no fundamental NEED for gold - we WANT it. Because the desirability of gold is NOT fixed, Gold has no inherent value. It is just another currency. It has no extraordinary properties. Unlike fiat currencies, whose value is partially controlled by the state that issues it, gold is controlled solely by the whims of every other nation on the planet. The only thing worse than the US government managing the dollar is every other nation on the planet managing the dollar!
Only a very small percentage of gold is used for anything that has a real, tangible value, certainly not enough to drive the market value of gold in general.
The "stability" of the gold standard is a complete myth. By 1960, the going rate for gold in London was $40, compared to the fiat-value of gold in the US at $35. The next 11 years were spent trying to prop up a failed system where the US defined the value of gold by fiat while the rest of the world defined it in a free market. By the time Nixon axed it, the arbitrary gold standard had allowed the rest of the world to rob us blind.
Let's make it very clear: The primary use of gold is for people to decorate themselves. If anyone were to suggest that our monetary system should be based on the fashion sense of either anorexic bimbos or teenage punks wearing their pants around their ankles , we would immediately brand them insane. Yet when we base a monetary system on an element whose principal use is jewelry, we're expected to believe that this makes excellent financial sense.
Remember that value isn't based solely on scarcity, but also desirability. There is no fundamental NEED for gold - we WANT it. Because the desirability of gold is NOT fixed, Gold has no inherent value. It is just another currency. It has no extraordinary properties. Unlike fiat currencies, whose value is partially controlled by the state that issues it, gold is controlled solely by the whims of every other nation on the planet. The only thing worse than the US government managing the dollar is every other nation on the planet managing the dollar!
Only a very small percentage of gold is used for anything that has a real, tangible value, certainly not enough to drive the market value of gold in general.
The "stability" of the gold standard is a complete myth. By 1960, the going rate for gold in London was $40, compared to the fiat-value of gold in the US at $35. The next 11 years were spent trying to prop up a failed system where the US defined the value of gold by fiat while the rest of the world defined it in a free market. By the time Nixon axed it, the arbitrary gold standard had allowed the rest of the world to rob us blind.
I don't know... I think gold would be better just for the simple fact that you can't print gold! I believe that is a huge part of the problem. In the grand scheme of things the purchase power of 1 oz of gold in 1900 was likely at least in the BALLPARK of the spending power it has today.... You can't say that about paper money. Is that not close to the definition of stable?? I've been wrong before!
Oh darn.... The chart proves me wrong... Just LOOK at how much more stable currency became after getting rid of the awful gold standard....
__________________
"A society that puts equality ... ahead of freedom will end up with neither equality nor freedom."
I don't know... I think gold would be better just for the simple fact that you can't print gold! I believe that is a huge part of the problem. In the grand scheme of things the purchase power of 1 oz of gold in 1900 was likely at least in the BALLPARK of the spending power it has today.... You can't say that about paper money. Is that not close to the definition of stable?? I've been wrong before!
EVEN WITH A GOLD STANDARD, the dollar is fiat currency. The government made a fiat declaration that the dollar was worth 1/35 of an ounce of gold. They can change that fiat declaration AT ANY TIME.
Even under a gold standard, the fact that a dollar is worth a certain quantity of gold is backed by nothing other than the full faith and credit of the United States. It is backed by nothing but our promise to exchange gold for dollars at a specific rate under the exclusive control of the US government.
With a fiat currency, the value of a dollar is determined primarily by the market.
Quote:
Oh darn.... The chart proves me wrong... Just LOOK at how much more stable currency became after getting rid of the awful gold standard....
Are you conflating "lack of inflation" with "stability"?
__________________
We work together every damn day. --Jon Stewart
Oh darn.... The chart proves me wrong... Just LOOK at how much more stable currency became after getting rid of the awful gold standard....
failure to understand compund changes....... the more you zoom in at ANY point on that graph it will look pretty much the same, exponential growth, you can't see for most of the graph because the later exponential growth cuts it off, remove the appearance of the last 40 year spike and guess what? the chart will likely look just the same except it will look like it spiked 70's, remove another 40 years and it will look like it spiked in the 30's...... and so on.
A landmark system for monetary and exchange rate management established in 1944. The Bretton Woods Agreement was developed at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire, from July 1 to July 22, 1944. Even as World War II raged on, 730 delegates from the 44 Allied nations attended the conference.
Major outcomes of the Bretton Woods conference included the formation of the International Monetary Fund and the International Bank for Reconstruction and Development and, most importantly, the proposed introduction of an adjustable pegged foreign exchange rate system. Currencies were pegged to gold and the IMF was given the authority to intervene when an imbalance of payments arose.
EVEN WITH A GOLD STANDARD, the dollar is fiat currency. The government made a fiat declaration that the dollar was worth 1/35 of an ounce of gold. They can change that fiat declaration AT ANY TIME.
Even under a gold standard, the fact that a dollar is worth a certain quantity of gold is backed by nothing other than the full faith and credit of the United States. It is backed by nothing but our promise to exchange gold for dollars at a specific rate under the exclusive control of the US government.
With a fiat currency, the value of a dollar is determined primarily by the market.
Are you conflating "lack of inflation" with "stability"?
(Wikipedia)
fi?at mon?ey Noun: Inconvertible paper money made legal tender by a government decree.
If you consider a currency that loses half it's purchase power in a span of 25 years "more stable" then that's fine... And yes, I believe that kind of inflation is unstable... And too easily manipulated.
You are right, under the gold standard the gov't could change the "value" of it's paper money but it would be apparent. Under the current system, it is under the radar. It enables the gov't to carry out what I call a "stealth tax". When your cash loses spending power it is the SAME as taking money out of your pocket.
__________________
__________________
"A society that puts equality ... ahead of freedom will end up with neither equality nor freedom."
Linear Mode
