The Bretton Woods Agreement of 1944 was based on a global gold standard. The U.S. dollar was made the global reserve currency as the price of gold was fixed at $35 per ounce. Countries with a trade surplus accumulated dollars and could trade them for gold from the U.S. The U.S. bungled in this arrangement by running trade deficits. The U.S. had a manufacturing-based economy with strong unions at the time and helped rebuild Europe from the rubble of Word War II. Laissez-faire capitalism was in retreat as American workers rose from poverty to form a huge middle class and the consumer economy. The new prosperous American welfare state enabled millions to rise from poverty to create a huge middle class. But Bretton Woods unraveled and America slid downhill from its peak and hence the longing has arisen to “make America great again”.
In 1960 postwar American monetary supremacy via the Bretton Woods system was rock solid. One morning, a young Chase Manhattan banker was startled when an aide stormed into his office with terrible news: “Gold rose to 40 dollars!”. In a world made in America’s image, where gold seemed to be permanently fixed at $35/ounce, the news struck Paul Volcker, the young banker in our story, an apocalyptic. On that day, Volcker got it: The Bretton Woods system was on its way out. Years later as treasury under-secretary in the Nixon administration, Volcker saw his prophecy come true.
Americans in the 1960’s began to spend more money on European and Japanese goods and less on American goods. Over the years dollars spent on these imports were exchanged for American gold. In January 1965, President De Gaulle of France held a press conference, announcing his order that 25,900 bars of gold be transported from the New York Federal Reserve to Paris. This news led several European companies and various European central banks to demand from the American authorities gold in exchange for their stockpiled euro-dollars. Speculators sniffed blood and borrowed oodles of dollars to buy gold and, thus, the unofficial price of gold rose to more than $70 an ounce, when America was still legally bound to sell gold at $35 an ounce.
By March 1971, West Germany held more reserves and dollars and yen than did the U.S. government. In the summer of 1971 France asked America to redeem its dollar stash in gold. Belgium and the Netherlands traded in their dollars for gold and Germany declared its intention to do so likewise. By 1971, total US gold reserves had fallen to just $10 billion, while foreign central banks held some $80 billion — eight times the total of US gold reserves. The Federal Reserve, in the face of rising inflation and commodity prices in 1971, increased the money supply by 10%. Fearing massive inflation and no longer willing to prop up the dollar, inflation-leery West Germany pulled its Deutsche Mark from the Bretton Woods agreement. This German withdrawal sparked panic and a currency crisis. By the end of June 1971, $22 billion in assets had left the US. In July 1971, Switzerland redeemed $50 million for gold and one month later in August, pulled its Swiss Franc from the Bretton Woods agreement. At the same time, France redeemed $191 million for gold by sending a French battleship to New York to take delivery of the gold from the Federal Reserve and to bring it back to France. The final straw was on August 11, 1971, when the British ambassador requested to redeem an astonishing $3 billion for gold -roughly one third of the total gold reserves of the US, at the time. The same day, Congress released a report recommending a devaluation of the dollar in an effort to protect the dollar from “foreign price-gougers.”
The dollar was in a full blown crisis and was on the brink of collapse and hyperinflation as faith had been lost. Paul Volcker, Treasury Undersecretary, told Treasury Secretary John Connally, who agreed, that it was time to persuade Nixon to “throw the book at the Europeans”. The U.S. would otherwise lose its remaining gold reserves. European challenges to America’s management of global capitalism gave Connally and Volcker the opportunity to impress upon the president that there was no alternative: He had to ditch the international monetary system. The Postwar “New World Order” with the United States on top was about to crumble. This meant Europeans were dumped along with this world order, the Bretton Woods system.
So, on August 15, 1971 President Richard Nixon, in an event that would come to be known as the Nixon shock, unilaterally closed the U.S. gold window (ceased redeeming dollars for gold held in reserve) and imposed a 90 day price and wage freeze along with a 10% surcharge tax on imports. For the first time ever, America was on a full fiat paper system.
The 1971 end of Bretton Woods was the first of many crises that ultimately led to the rise of neoliberalism, the re-assertion of corporate power both over government policies and labor. Economists advocating free markets and maligning government interference in the economy, Milton Friedman and Friedrich von Hayek, became popular. A persuasive capitalist rhetoric emerged, creating an effective populist polemic of the meddlesome bloatedly bureaucratic and tyrannical federal government vs. the free enterprise system. Lewis Powell, future Supreme Court justice, sent a confidential memo to the U.S. Chamber of Commerce in August 1971. He argued that criticism of and opposition to the U.S. free enterprise system had gone too far and “that the time had come — indeed it’s long overdue — for the wisdom, ingenuity, and resources of American business to be marshalled against those who would destroy it”.
Paul Volcker was appointed by Jimmy Carter as chairman of the Federal Reserve in August 1979, when one dollar had represented 1/300th of an ounce of gold. Just five months later, on January 21, 1980, the dollar represented only 1/850th of an ounce of gold. Confidence in the U.S. dollar plummeted as dollar-denominated assets were dumped and shifted to gold or primary commodities such as oil. The leaders of the Federal Reserve Board realized that a drastic change in polices was necessary if U.S. in order to avert a disaster for world capitalism.
So Volcker raised the Fed funds rate to its highest point in history to end double-digit inflation. The Federal Reserve System decided shortly after Volcker’s appointment that instead of announcing that they were going to raise interest rates sharply—which was their real policy—they would announce that from now on the “quantity of money” would be targeted, as opposed to interest rates such as the federal funds rate. The Fed could then explain that since they no longer targeted interest rates, they could do nothing about the skyrocketing rate of interest.
During the “Volcker shock” lasting 3 years, unemployment soared, credit-sensitive industries such as residential construction and automobiles plunged into deep depression, and much of basic industry—especially that of the older capitalist countries such as the United States and Britain, collapsed. The “rust belt” was what remained from the demolition of the U.S. steel industry—previously backbone of the huge U.S. industrial machine. American steel mills were shut down to set the stage for globalization, cheaper steel to be imported from Japan and other countries paying their workers less.
Some authors praise Volcker for stopping stagflation and saving the dollar. With no gold standard to anchor the dollar in the post Bretton Woods era, it had devalued considerably and the possible horror of Weimar-Germany 1923 inflation emerged. Developed nations were dumping their dollars for gold and oil and gold peaked at $850 per ounce in January 1980, indicating the dollar’s relative devaluation. But saving the dollar, though deemed courageous by some, turned out to be capital (capitalists) crushing labor (workers).
SOURCES:
And the Weak Suffer What They Must? Europe’s Crisis and America’s Economic Future by Yanis Varoufakis
A Critique of Crisis Theory (blog): From the 1974-75 Recession to the ‘Volcker Shock’ by Sam Williams
https://www.thebalance.com/who-is-paul-volcker-3306157
Brief History of Neoliberalism by David Harvey
https://www.zerohedge.com/article/guest-post-original-dollar-crisis-and-how-it-led-todays-crisis-part-1
http://buying-gold.goldprice.org/2008/01/what-happened-to-gold-price-in-1980.html