By Tom Switzer
Today marks the 40th anniversary of one of the most important economic events in the postwar era. On August 15, 1971, US president Richard Nixon floated the dollar and ended its convertibility into gold, bringing to an end the Bretton Woods monetary system.
Under Bretton Woods -- the name given to the postwar system in the New Hampshire town in 1944 -- the greenback was convertible into gold at the rate of $US35 an ounce. World currencies were pegged to the dollar. By all accounts, the system set the scene for the 20th century's greatest era of global economic growth.
By 1971, however, Nixon and his advisers believed Bretton Woods was untenable: the US was running vast debts to pay for the Vietnam War, inflation was soaring, other nations were increasingly nervous about holding dollars, and so threatened a run on the US gold reserve, and the US was losing its industrial supremacy and trying to retain its market credibility.
The closing of the gold window, taken together with wage-price controls and an import tariff, represented a watershed in economic history. Farewell the fixed exchange rate and welcome paper money and floating dollars. At the time, economists from Milton Friedman to Paul Samuelson praised the announcement. Even The New York Times, the bete noir of the Nixon White House, editorialised: "President Nixon has moved with startling decisiveness to stabilise the dollar and spur economic growth."
The stockmarket rallied. In 1972, the economy grew more than 5 per cent, unemployment did not rise, and inflation declined from 4.1 per cent to 1.7 per cent. All of this was just in time for the November 1972 election, which Nixon won in one of the biggest landslides in modern US history.
What became known as the "Nixon shocks", however, were unilateral, internationally disruptive and, in the case of wage-price freeze, opportunistic. Like most Republicans, Nixon had long championed the fiscal conservative ideals of small government and free markets. As president, however, he was an unashamed Keynesian.
Forty years later, critics complain that the end of the gold standard placed the world in uncharted territory: a rapidly declining dollar, growing trade imbalances and spiralling debt.
From the stagflation in the 1970s and wild stockmarkets and currency crises in the mid-1980s to the Asian financial contagion in 1997-98 and the sub-prime housing bubbles, as well as sovereign debt crises today, the West has experienced accelerating financial and economic vulnerability. Meanwhile, gold has gone from $US35 to $US1750 an ounce.
Veteran Wall Street Journal editor Robert Bartley argued that the decision to abandon Bretton Woods "did more tangible harm than any other action during the Nixon administration, including Watergate". More recently, US publisher Steve Forbes has suggested: "Almost no one in Washington appreciates what a disaster the 1971 decision to break from the gold standard has been. It led to a decade of horrific inflation, a disastrous decline in US influence around the world and a malaise here at home."
In fairness, Nixon's decision to end the gold standard may have been unavoidable. After all, Bretton Woods was already creaking badly: its $US35 gold price may have been indefensible and the US was facing the early stage of economic challenge from Japan and western Europe. America's trade deficit in 1971 -- its first since the 1890s -- meant foreigners holding dollars were increasingly reluctant to exchange them for US goods.
Nixon's decision also took place as the nation was questioning a Pax Americana, the notion that the US could impose its will and leadership all across the post-Vietnam world.
Nixon himself reflected the emerging consensus in July 1971 when he declared: "Instead of America being No 1 in the world from an economic standpoint, the pre-eminent world power we think in economic terms and economic potentialities, there are five power centres in the world today." He identified the US, the Soviet Union, Japan, western Europe and China as the pillars of a multi-polar world that would not conform to US expectations.
Here was Nixon, a longtime advocate for US global hegemony, acknowledging what none of his successors has recognised: that US power was past its apogee in a plural world. As the US reels from recent setbacks -- quagmires in Iraq and Afghanistan, 9 per cent unemployment, swelling home foreclosures, skyrocketing debt -- it's worth asking: was Nixon ahead of his time?
Tom Switzer is a research associate at the US Studies Centre at the University of Sydney