A Half-Century Since The Beginning Of The End Of The Post WW II Economic Order
A Half Century Since The Beginning Of The End Of The Post WW II Economic Order
It was also on a Sunday, with financial markets closed, that August 15, 1971, when US President Richard Nixon gave a surprise address to the nation on economic policy. He made three announcements:
1) a 90-day wage-price freeze,
2) a10 percent across the board tariff on all imports, and most importantly,
3) the closing of the gold window meaning the US Treasury would no longer pay gold to somebody bringing US dollars to it, the final end of the gold standard.
It was not quite the end of the post-WW II Bretton Woods system, established in 1944 at a conference at that New Hampshire town as the mostly fixed exchange rate system was maintained, but that would end in early 1973 when the US dollar was set to float against other major currencies according to market forces, which is what it has done ever since, although with an occasional market intervention here and there. Later in 1973 would come to the first OPEC-led oil price shock, and most observers consider that year to be the actual end of that post-WW II economic order, which saw mostly solid growth in the leading economies of Western Europe, North America, and Japan, with a few exceptions, notably the UK.
This move fundamentally reflected something that has continued, a steady decline of the relative economic position of the US in the world economic system, which was a peak at the end of WW II when the Bretton Woods system was put in place. Then the US had half the world’s GDP, and basically had trade surpluses with nearly every nation in the world. There was a dollar shortage, and the US would set up programs such as the Marshall Plan to overcome this and provide financial assistance especially to war-damaged western European economies. But then in the 1950s, while the UK went into a general decline, losing its colonies and the global status of its pound sterling, running chronic large trade deficits that led to several devaluations of the pound, other nations grew rapidly with the Common Market being formed on the European continent and West Germany and France and Italy all growing solidly, as well as Japan, of course.
By the early 1960s many of these nations had turned the trade situation around and were running bilateral surpluses with the US. France’s President de Gaulle emphasized the change of status, along with withdrawing from NATO and developing its independent nuclear “force de frappe,” he also demanded that the US pay France gold to cover the deficits. In practice this meant that in the basement of the New York Federal Reserve Bank somebody went into a room where gold was identified as belonging to the US and then moving it to another room down a hall or two where there was gold identified as belonging to France. August 15, 1971, put an end to this sort of publicity stunt. But rising trade deficits and rising inflation pushed Nixon, who was looking at a reelection campaign the following year (when he took 49 states), to make his moves to put both inflation and trade deficits at least temporarily under control.
It is a curious thing that it is really quite rare for there to be a single day when something happens that leads to a systemic change of the world economic system. I can only think of two days since of comparable significance. One was November 8, 1989, when the Berlin Wall fell, which presaged the collapse of communism in Eastern Europe, the end of the Cold War, and the move into the transition of basically the entire Soviet bloc, with the Soviet Union itself splintering into 15 nations at the end of 1991. The paths these nations have taken since have been quite diverse and with widely varying outcomes. But the global economic system was certainly changed.
I think another date of great significance was September 18, 2008, although this was not accompanied by major public announcements. But this was the most dramatic point of the financial crash that dragged the world into the Great Recession. But it led to major changes in how central banks operate around the world, led by the US Fed making a not-publicized decision to bail out the European Central Bank, which in turn was struggling to prop up various major European banks that were getting dragged down in the crash. The Fed did a swap that put over half a trillion USD of European debts on its books, which would be gradually unloaded over the next six months to be replaced by mortgage-backed securities, also something the Fed had not had on its books before. But various other tools were created or brought out then that have remained, such as quantitative easing.
I supposed another possible one would be the day in late 1973 when indeed Saudi Arabia announced its oil embargo of the US during the Yom Kippur War, which was followed by a massive increase in oil prices, the first oil price shock. But it was probably the case that such an increase was coming, even if it might have arrived more gradually without that move. But that move, and the ending of the fixed exchange rate system earlier that year, were arguably the outcome of Nixon’s speech a half-century ago today.
Barkley Rosser
When the dividends tax credit that had somewhat restrained equities trading since the permanent income tax was implemented along with the Fed in 1913, then that set the table for the financialization of non-financial stock owned firms. When Nixon unleashed the dollar from gold, then that set the stage for globalization of financialized firms. Little US trade deficits became persistent and large. The rich became richer and the workers got McJobs. I doubt that Nixon really knew what he was doing. Watergate kind of proved that.
Nixonomics was just one of a handful. Tricky Dick was not one of the good guys.
Michael,
Agreed. Dick had Kissinger for foreign policy, but I do not know who he depended upon for economic policy. Of course his economic policy was so destructive that he may have been calling the shots himself.
Thanks!
Yesterday I was deep into thise and looking at a ton of data with 1971 inflection points and how the general stagnation of the lower 60% of households has persisted since arguably 1965 on an inflation adjusted basis. It was almost as 1965 abundance started retracting and in 1971 was kicked in the teeth by poor Nixonomics, which was made worse by Reaganomics and hasn’t been really corrected sense.
One correction I do see happening is worker participation declined. This has the awesome effect of throwing inflationary pressure at wages to help nominal wage hikes finally happen, as the boomers finally retire. We are also seeing declines in participation in younger stats as well with women choosing to either not work or start their own businesses.
We are in for some pleasant times if we can get the fed to realize their mandate of employment is flawed. They should refocus to solely monetary policy and leave employment to fiscal policy, which is finally seeing some thaw in the $3.5 trillion budget coming up next month.
Michael,
Generally agreed, but two things. Monetary policy and fiscal policy need to be coordinated well enough that tight money does not squash stimulus from Uncle spending. Also, it takes some real crazy stuff to happen just to get Uncle spending.
Liberals do not believe in burning books, but I doubt that just burning every book written by Milton Friedman would be enough to change things anyway :<)