The Nixon shock is a series of economic steps undertaken by US President Richard Nixon in 1971, the most significant one being the unilateral cancellation of a direct international convertibility from the United States dollar to gold.
While Nixon's actions did not formally abolish the existing Bretton Woods international financial exchange system, the suspension of one of its major components effectively rendered the Bretton Woods system inoperative. While Nixon publicly declared its intention to continue the direct convertibility of the dollar after the Bretton Woods system reform was implemented, all reform efforts proved unsuccessful. In 1973, the Bretton Woods system was replaced de facto by the current regime based on free float fiat currency.
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In 1944 in Bretton Woods, New Hampshire, representatives from 44 countries met to develop a new international monetary system which came to be known as the Bretton Woods system. Conference participants hope that the new system will "ensure exchange rate stability, prevent competitive devaluation, and promote economic growth." It was not until 1958 that the Bretton Woods system became fully operational. Countries now settle their international accounts in dollars that can be converted into gold at a fixed exchange rate of $ 35 per ounce, which can be exchanged by the US government. Thus, the United States is committed to supporting every dollar abroad with gold, and other currencies pegged to the dollar.
For the first years after World War II, the Bretton Woods system worked well. With the Marshall Plan, Japan and Europe rebuilding from war, and countries outside the US want dollars to buy American goods - cars, steel, machinery, etc. Because the US has more than half of the world's official gold reserves - 574 million ounces at the end of World War II - the system looks secure.
However, from 1950 to 1969, when Germany and Japan recovered, the US share of world economic output fell significantly, from 35% to 27%. Furthermore, negative balance of payments, growing public debt issued by the Vietnam War, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s.
In France, the Bretton Woods system is called "America's exorbitant privileges" for producing an "asymmetric financial system" in which non-US citizens "see themselves as supporting American living standards and subsidizing American multinational corporations." As American economist Barry Eichengreen puts it: "It costs just a few cents for the Engraving and Printing Bureau to make $ 100 bills, but other countries have to pay $ 100 off the real stuff to get one." In February 1965, President Charles de Gaulle announced his intention to exchange US dollar reserves for gold at official exchange rates.
In 1966, non-US central banks held $ 14 billion, while the United States only had $ 13.2 billion in gold reserves. Of these reserves, only $ 3.2 billion is capable of covering foreign ownership while the rest includes domestic ownership.
In 1971, the money supply increased 10%. In May 1971, West Germany left the Bretton Woods system, unwilling to reassess Deutsche Mark. In the next three months, this move strengthens its economy. At the same time, the dollar fell 7.5% against Deutsche Mark. Other countries are beginning to demand redemption of their dollars for gold. Switzerland exchanged $ 50 million in July. France acquired $ 191 million in gold. On August 5, 1971, the United States Congress released a report recommending the devaluation of the dollar, in an effort to protect the dollar against "foreign price-gougers". On August 9, 1971, when the dollar fell in value against the European currency, Switzerland abandoned the Bretton Woods system. Pressure began to rise in the United States to leave Bretton Woods.
Maps Nixon shock
Event
At that time, the US also had an unemployment rate of 6.1% (August 1971) and an inflation rate of 5.84% (1971).
To address these issues, President Nixon consulted with Federal Reserve chairman Arthur Burns, Finance Minister entered John Connally, and then Deputy Minister of International Monetary Affairs and Fed Chairman of the future Paul Volcker.
On the afternoon of Friday, August 13, 1971, these officials along with twelve other White House and Financial advisors met in secret with Nixon at Camp David. There was a great debate about what Nixon had to do, but in the end Nixon, relied heavily on the advice of the confident Connall, decided to break the Bretton Woods by suspending the convertibility of dollars into gold; freeze wages and prices for 90 days to combat potential inflation effects; and impose a 10 percent import surcharges, to prevent a run of dollars, stabilize the US economy, and reduce US unemployment and inflation rates, on August 15, 1971: Nixon directs Finance Minister Connally to suspend, with certain exceptions, the convertibility of dollars into gold or other reserve assets, ordering a golden window to close in such a way that foreign governments can no longer exchange their dollars for gold.
Speaking on television on August 15th, Sunday before the market opened, Nixon said the following:
The third element indispensable in building new prosperity is closely linked to creating new jobs and stopping inflation. We must protect the US dollar position as a pillar of monetary stability worldwide.
In the past 7 years, there has been an average of one international monetary crisis each year...
I have directed the Secretary of Connally to temporarily suspend the convertibility of dollars into gold or other reserve assets, except in the amount and conditions prescribed for the benefit of monetary stability and in the best interests of the United States.
Now, what is this action - very technical - what does it mean to you?
Let me lie down to rest the bugaboo from what is called a devaluation.
If you want to buy a foreign car or travel abroad, market conditions can cause your dollars to buy less. But if you're among the majority of Americans who buy American-made products in America, your dollars will be worth the same as today.
The effect of this action, in other words, is to stabilize the dollar.
The American public feels the government is saving them from the price gunter and from foreign exchange-induced crises. Politically, Nixon's actions were a huge success. The Dow gained 33 points the following day, its biggest daily rally at the time, and the editorial of the New York Times read, "We unhesitatingly appreciate the courage that has been moved by the President."
In December 1971, import surcharges were imposed as part of the general revaluation of the Group of Ten currencies (G-10), which under the Smithsonian Agreement thereafter permitted a 2.25% devaluation of the agreed exchange rate. In March 1973, the exchange rate system remained a floating exchange rate system. Currency exchange rates are no longer the primary means of government in managing monetary policy.
Branch later
Nixon Shock has been widely regarded as a political success, but a mixed bag of economics in bringing on stagflation in the 1970s and leading to the instability of floating currencies. The dollar fell by a third during the 70s. According to the World Trade Review report, "Douglas Irwin reported that for several months, US officials could not get other countries to approve the official revaluation of their currencies. The German sign was rewarded significantly after being allowed to float in May 1971. Furthermore, Nixon Shock issued huge speculation against the dollar. This forced the Japanese central bank to intervene significantly in the foreign exchange market to prevent the yen from rising in value. In the two days of August 16-17, 1971, the Japanese central bank had to buy $ 1.3 billion to support the dollar and keep the yen on the old 360 yen level against the dollar. Japan's foreign exchange reserves increased rapidly: $ 2.7 billion (30%) a week later and $ 4 billion the following week. However, large-scale intervention by Japan's central bank could not prevent the depreciation of the US dollar against the yen. France is also willing to let the dollar depreciate against the franc, but not let the franc value gold (Page 14 Douglas). Even later, in 2011, Paul Volcker expressed regret over the abandonment of Bretton Woods: "Nobody is in charge," Volcker said. "The Europeans can not live with the uncertainty and make their own currency and now it's in trouble."
In 1996, economist Paul Krugman (Nobel Prize in Economic Sciences, 2008) summarized the Post-Nixon Shock era as follows:
The current world monetary system does not provide a special role in gold; indeed, the Federal Reserve is not obliged to tie the dollar for anything. It can print as much or as little money as it deems appropriate. There are strong advantages to this unrestricted system. Above all, the Fed is free to respond to an actual or threatened recession by pumping money. To take just one example, the flexibility that was the reason for the 1987 stock crash - which began every year as frighteningly as it did in 1929 - did not cause a deterioration in the real economy.
Although free-floating national money has advantages, it also has risks. For one thing, it can create uncertainty for international traders and investors. Over the past five years, the dollar has been worth as much as 120 yen and at least 80. The cost of volatility is difficult to measure (in part because sophisticated financial markets allow businesses to protect most of those risks), but they must be significant. Furthermore, the system that makes monetary managers free to do good also makes them free to be irresponsible - and, in some countries, they are quickly taking chances.
The debate over Nixon Shock has continued to this day, with economists and politicians across the political spectrum trying to understand Nixon Shock and its impact on monetary policy in the light of the 2007-2008 financial crisis.
See also
- Fiat Money
- Triffin Dilemma
- PetroDollar
- Bullion Depository United States
Note
References
- Bordo, Michael D.; Eichengreen, Barry, eds. (1993). Bretton Woods System Retrospection: Lessons for International Monetary Reform . Bretton Woods, 3-6 October 1991. Chicago: National Economic & amp; Research Bureau University of Chicago Press. ISBN: 0226065871.
External links
- Stemming Inflation: Emergency Preparedness Office and 90-day freeze: A complete history of the management of a 90-day wage freezing fee, made by the Emergency Preparedness Office and the newly assigned Fee of the Living Board.
- Economics in the Mid-1972: A testimony from the Economic Advisory Board before the Joint Economic Committee on economic developments since the Nikson President's New Economic Policy was adopted on 15 August 1971
- Peter Gowan interviews the political and economic impact of ending the Bretton Woods system
Source of the article : Wikipedia
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