Nixon Shock
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In U.S. political history, the term Nixon Shock refers to two different policy measures taken by U.S. President Richard Nixon in 1971 and 1972.[citation needed] The first was his unilaterally cancelling the Bretton Woods system and ceasing the direct convertibility of the United States dollar to gold. The second shock was the 1972 Nixon visit to China, a surprising twist to Cold War diplomacy.
[edit] The Bretton Woods system ends
By the early 1970s, as the costs of the Vietnam War and increased domestic spending accelerated inflation, [1] the U.S. was running a balance of payments deficit and a trade deficit, the first in the 20th century. The year 1970 was the crucial turning point, which, because of foreign arbitrage of the U.S. dollar, caused governmental gold coverage of the paper dollar to decline 33 percent, from 55 to 22 per cent. That, in the view of neoclassical economists, represented the point where holders of the U.S. dollar lost faith in the U.S. government’s ability to cut its budget and trade deficits.
In 1971, the U.S. government again printed more dollars (a 10 per cent increase) [1] and then sent them overseas, to pay for the nation's military spending and private investments. In the first six months of 1971, $22 billion dollars in assets left the U.S.[citation needed] In May 1971, inflation-wary West Germany was the first member country to leave the Bretton Woods system — unwilling to deflate the deutsche mark to prop up the dollar.[1] In order to prevent the dumping of the deutsche mark on the open market, West Germany did not consult with the international monetary community before making the change. In the next three months, West Germany’s move strengthened their economy; simultaneously, the dollar dropped 7.5 per cent against the deutsche mark.[1]
Because of the excess printed dollars, and the negative U.S. trade balance, other nations began demanding fulfilment of America’s “promise to pay” — in the form of gold from the U.S., in exchange for paper dollars, thus, did Switzerland trade $50 million of paper for gold in July. [1] France, in particular, repeatedly made aggressive demands, and acquired large amounts of gold ($191 million), further damaging the economy of the U.S. [1] On 5 August 1971, Congress released a report recommending devaluation of the dollar, in an effort to protect the dollar against foreign price-gougers. [1] Still, on 9 August 1971, as the dollar dropped in value against European currencies, Switzerland withdrew the Swiss franc from the Bretton Woods system.[1]
To stabilize the economy and combat runaway inflation, on August 15, 1971, President Nixon imposed a 90-day wage and price freeze, a 10 per cent import surcharge, and, most important, “closed the gold window”, making the dollar non-convertible to gold — except on the open market. The President and fifteen advisors took that decision, without consulting the members of the international monetary system, thus, the international community informally named it the Nixon shock. Given the importance of the announcement — and its impact upon foreign currencies — presidential advisors recalled that they spent more time, at Camp David, deciding when to publicly announce the controversial plan, than they spent creating the plan. [2]
As a politician, the President did not want to interrupt television viewers watching the tremendously popular TV series Bonanza, not wishing to potentially alienate those voters who fanatically followed the cowboy series. He was advised that the practical decision was to make an announcement before the stock markets opened on Monday (and just when Asian markets also were opening trading for the day). On 15 August 1971, that speech and the price-control plans proved very popular and raised the public’s spirit. The President was credited with finally rescuing the American public from price-gougers, and from a foreign-caused exchange crisis. [2][3]
By December, 1971, the import surcharge was dropped, as part of a general revaluation of the major currencies, which, hence, were allowed 2.25 per cent devaluations from the agreed exchange rate. By March 1976, the world’s major currencies were floating — in other words, the currency exchange rates no longer were governments’ principal means of administering monetary policy.
[edit] See also
[edit] References
- ^ a b c d e f g h Frum, David (2000). How We Got Here: The '70s. New York, New York: Basic Books. pp. 295-298. ISBN 0465041957.
- ^ a b Yergin, Daniel; Joseph Stanislaw (1997). "Nixon Tries Price Controls". Commanding Heights. http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/ess_nixongold.html. Retrieved on 2008-11-02.
- ^ Hetzel, Robert L. (2008), p. 84
