The series of events and crises that transformed America from a welfare-for-all state to a welfare-for-the-wealthy state happened over many years. The year 1973, however, seems to be a turning point with the OPEC oil embargo, oil crisis, the recession that ensued, and the beginning of stagnation of wages. Even as productivity kept increasing, wages stagnated. The wage stagnation has persisted ever since that turning point. In 1973, median earnings for men who worked full-time, year-round were $51,670 in inflation-adjusted 2012 dollars. The median earnings of men who work full-time year-round have never been that high again.
Contrast the dismal 1970’s with America’s golden era. America the Superpower was unveiled during World War II. Even before Germany and Japan were defeated, the U.S. worked with its mentor empire, Britain, to forge a new political and institutional settlement to stabilize global capitalism, curbing its most self-destructive tendencies and consolidating international peace with the help of newly formed United Nations, headquartered in New York City. New institutions within this new global system were the International Monetary Fund and The World Bank both headquartered in Washington, DC. This new system was called Bretton Woods for the New Hampshire town holding the 1944 meeting. The industrial nations participating were to have full employment, economic security, and social protection from this new system. The new phase of capitalism that was ushered in has been called “regulated capitalism” with theoretical grounding by economist John M. Keynes and the policies of president Franklin Roosevelt and those of social democratic European nations.
When World War II came to an end in May-August 1945, the United States was at the peak of its relative industrial and financial power. The United States had three-fourths of the world’s invested capital. In 1940, the U.S. had two-thirds of the world’s oil reserves, while the Middle East had only 5 percent. The better part of agricultural production was also located in the United States. The U.S. GDP was five times that of the United Kingdom, the second most powerful imperialist country. The U.S. also had two-thirds of the world’s gold reserves, and that’s not counting the portion of European gold reserves that were kept in the United States for “safekeeping.” In 1945, U.S. domination was solidly rooted in the sphere of material production, military power and finance.
In 1944, with the defeat of Germany and Japan clearly in sight, an international conference of the victorious “allied” powers was held in Bretton Woods, New Hampshire. Given the emerging balance of military and thus political power, it was inevitable that the United States would dominate the post-World War II monetary system even more thoroughly than Great Britain had dominated the classical international gold standard in the decades preceding World War I.
Not surprisingly, the new international monetary system that emerged out of the Bretton Woods conference was essentially an international extension of Roosevelt’s Depression-era reforms of the U.S. domestic monetary system. As was the case under the classical gold standard, the U.S. dollar was defined in terms of a given weight of gold bullion, namely 1/35th of a fine troy ounce of gold. However, under the Bretton Woods System, contrary to the classical gold standard, the U.S. did not coin gold. Other currencies were defined in terms of their exchange rates with the U.S. dollar. These rates were fixed but were subject to renegotiation either down against the dollar—devaluation—or up against the dollar—revaluation. There was, however, no provision to change the quantity of gold bullion measured in terms of weight that was defined as a dollar.
The U.S. Treasury promised to redeem every $35 presented to it by either foreign governments or central banks in one troy ounce of fine gold bullion. For this system to work, the price of gold bullion on the London-based international gold market had to be kept near $35 an ounce. If it were allowed to rise significantly above $35 an ounce for a prolonged period of time, governments and central banks would have every incentive to exercise their rights to cash in their dollars for gold at the $35 an ounce rate and either sell it at the higher dollar price on the international gold market or simply hang on to the gold.
The general postwar trend was the U.S. moving from trade surpluses to trade deficits. Its position as global money hegemon allowed it to live beyond its means. The U.S. could import foreign merchandise, acquire foreign companies, and engage in foreign military adventures all at the same time. In France, the Bretton Woods System was called “America’s exorbitant privilege” as it resulted in an “asymmetric financial system” where non-US citizens “see themselves supporting American living standards and subsidizing American multinationals”. Throughout the 1950’s and 1960’s the U.S. ran trade surpluses, except for 1959 until 1971.
Yanis Varoufakis found that as early as 1960 the writing was on the wall. In spite of America’s shining postwar image, flaws in Bretton Woods appeared. 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 was supposedly fixed ad infinitum at $35 an ounce, the news struck Paul Volcker, the young banker, as apocalyptic. On that day, Volcker got it: The Bretton Woods system was on its way out. Would American postwar hegemony perish with it? Not necessarily, he surmised.
This sudden panic buying of gold (manifested by the price rise to $40 an ounce) led to a meeting between the Bank of England and the US Federal Reserve, that the Bank of England should make available for market substantial supply to reduce and stabilize the price. As the Kennedy administration began the US had made it clear that it wanted to stop the drain on its own gold reserves. Newly-appointed Under-Secretary of the US Treasury Robert Roosa and officials of the Federal Reserve suggested that the U.S., the Bank of England and the central banks of the West Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg should set up a sales consortium to prevent the market price of Gold from exceeding $US 35.20 per oz.
Under this “London Gold Pool” arrangement, member banks provided a quota of gold into a central pool, with the Federal Reserve matching the combined contributions on a one to one basis. During a time of rising prices, the Bank of England, the agent, could draw on the gold from the pool and sell into the market to cap or lower prices. In the fall of 1961, London gold prices again began to creep up. In November, with the scheme now up and running, prices were once more stabilized in the $35 – $35.20 range.
In January 1965, France’s president De Gaulle ordered 25,900 bars of gold be transported from the basement of the New York Federal Reserve to Paris. This news led several European companies and various European central banks to demand gold from the American authorities 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 the United States was still legally bound to sell gold at only $35 an ounce. To add insult to injury, De Gaulle also pulled France’s military forces from NATO, demanding the removal at once for all NATO facilities from French soil.
German bankers were also dissatisfied with the Bretton Woods American dominance. They were forced to print more deutsche marks because speculators were betting on the mark’s increasing value against the dollar and franc. They loathed Chancellor Ludwig Erhard and considered him Washington’s man, a politician who cared more about helping America stabilize Bretton Woods than the Bundesbank’s (Germany’s central bank) crusade to keep the lid on German prices which they feared would escalate if they printed more money. In a move reminiscent of a banana republic rather than a European democracy, the Bundesbank engineered a sharp recession to oust the Erhard regime. The Bundesbank president, Karl Blessing, admitted to this years later. With a smidgeon of regret he said “we had to use brute force to put things in order”. The new regime, a coalition of rightwing Christian democrats and leftwing social democrats created the recession recovery of wage restraint and increased exports. German exports flooded Britain, France, and the United States, throwing off the trade balance and further destabilizing Bretton Woods.
By 1965 the pool was increasingly unable to balance the outflow of gold reserves with buybacks. Excessive inflation of the US money supply, in part to fund the Vietnam War, led to the US no longer being able to redeem foreign-held dollars into gold, as the world’s gold reserves had not grown in relation, and the payment deficit had grown to $3 billion. Thus, the London Gold Pool came under increased pressures of failure, causing France to announce in June 1967 a withdrawal from the agreements and moving large amounts of gold from New York to Paris. The 1967 devaluation of the British currency, followed by another run on gold and an attack on the pound sterling, was one of the final triggers for the collapse of the pooling arrangements. By spring 1968, “the international financial system was moving toward a crisis more dangerous than any since 1931”.
With accelerating inflation in the U.S. and gold flooding out to trading partners. In 1971 Belgium and the Netherlands traded in their dollars for gold, Germany said it would do the same, and France demanded gold for dollars to make repayment to the IMF. Gold reserves were now at there lowest since 1938. The last straw came when Britain requested gold. The American “gold window” was soon closed.
The impudent challenges to America’s management of global capitalism gave Nixon’s Treasury Secretary John Connally and his under-secretary, Paul Volcker, the opportunity to impress upon the president there was no alternative: He had to ditch the international monetary system, Bretton Woods, and he had to dump Europe along with it.
Speaking on television on August 15, the Sunday before the markets opened, Nixon ended Bretton Woods and the gold standard. He said:
The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world.
In the past 7 years, there has been an average of one international monetary crisis every year…
I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.
Now, what is this action — which is very technical — what does it mean for you?
Let me lay to rest the bugaboo of what is called devaluation.
If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.
The effect of this action, in other words, will be to stabilize the dollar
Nixon’s actions announced that day, sometimes called The Nixon Shock, marked the beginning of a new chaotic era. The detachment of the dollar from gold caused devaluation and is intimately connected to the spike in OPEC oil prices 3 years later. Capitalist oligarchs and free market ideologues joined forces, as we shall see, to transform the welfare state into a corpo-welfare state. For example, Lewis Powell and Milton Friedman. Stay tuned.
References:
Men Who Work Full-Time Earn Less Than 40 Years Ago by Terence P. Jeffrey (CNSnews article, Apr 28, 2014)
The Rise and Fall of Neoliberal Capitalism by David M. Kotz
Cold War and Global Hegemony, 1945-1991 by Melvin P. Leffler
Pivotal Decade: How the U.S. Traded Factories for Finance in the 1970’s by Judith Stein
A Superpower Transformed: The Remaking of American Foreign Relations in the 1970’s by Daniel L. Sargent
Critique of Crisis Theory blog (by Sam Williams), posts: 1) The American Empire and the Evolution of the International Monetary System; 2) The Industrial Cycle and Collapse of the London Gold Pool in March 1968
The Financial Tsunami, Part II: The Financial Foundations of the American Century by William F. Engdahl
And the Weak Suffer What They Must by Yanis Varoufakis
The Nixon Shock: wikipedia entry
Global Imbalances and The Lessons of Bretton Woods by Barry Eichengreen
Lessons from the London Gold Pool by Philip Judge