A Half Century Since The Beginning Of The End Of The Post WW II Economic Order

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Barkley Rosser
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 It was also on a Sunday, with financial markets closed, that August 15, 1971, when US President Richard Nixon gave a surprise address to the nation on economic policy.  He made three announcements: 1) a 90-day wage-price freeze, 2) a10 percent across the board tariff on all imports, and most importantly 3) the closing of the gold window meaning the US Treasury would no longer pay gold to somebody bringing US dollars to it, the final end of the gold standard.  It was not quite the end of the post-WW II Bretton Woods system, established in 1944 at a conference at that New Hampshire town as the mostly fixed exchange rate system was maintained, but that would end in early 1973 when the US dollar was set to float against other major currencies according to market forces, which is what it has done ever since, although with an occasional market intervention here and there.  Later in 1973 would come the first OPEC-led oil price shock, and most observers consider that year to be the actual end of that post-WW II economic order, which saw mostly solid growth in the leading economies of Western Europe, North America, and Japan, with a few exceptions, notably the UK.

This move fundamentally reflected something that has continued, a steady decline of the relative economic position of the US in the world economic system, which was a peak at the end of WW II when the Bretton Woods system was put in place. Then the US had half the world's GDP, and basically had trade surpluses with nearly every nation in the world.  There was a dollar shortage, and the US would set up programs such as the Marshall Plan to overcome this and provide financial assistance especially to war-damaged western European economies.  But then in the 1950s, while the UK went into a general decline, losing its colonies and the global status of its pound sterling, running chronic large trade deficits that led to several devaluations of the pound, other nations grew rapidly with the Common Market being formed on the European continent and West Germany and France and Italy all growing solidly, as well as Japan, of course.  

By the early 1960s many of these nations had turned the trade situation around and were running bilateral surpluses with the US. France's President de Gaulle emphasized the change of status, along with withdrawing from NATO and developing its independent nuclear "force de frappe," he also demanded that the US pay France gold to cover the deficits.  In practice this meant that in the basement of the New York Federal Reserve Bank somebody went into a room where gold was identified as belonging to the US and then moving it to another room down a hall or two where there was gold identified as belonging to France. August 15, 1971 put an end to this sort of publicity stunt.  But rising trade deficits and rising inflation pushed Nixon, who was looking at a reelection campaign the following year (when he took 49 states), to make his moves to put both inflation and trade deficits at least temporarily under control.

It is a curious thing that it is really quite rare for there to be a single day when something happens that leads to a systemic change of the world economic system.  I can only think of two days since of comparable significance.  One was November 8, 1989 when the Berlin Wall fell, which presaged the collapse of communism in Eastern Europe, the end of the Cold War, and the move into transition of basically the entire Soviet bloc, with the Soviet Union itself splintering into 15 nations at the end of 1991. The paths these nations have taken since have been quite diverse and with widely varying outcomes.  But the global economic system was certainly changed. 

I think another date of great significance was September 18, 2008, although this was not accompanied by major public announcements. But this was the most dramatic point of the financial crash that dragged the world into the Great Recession.  But it led to major changes in how central banks operate around the world, led by the US Fed making a not-publicized decision to bail out the European Central Bank, which in turn was struggling to prop up various major European banks that were getting dragged down in the crash.  The Fed did a swap that put over half a trillion USD of European debts on its books, which would be gradually unloaded over the next six months to be replaced by mortgage-backed securities, also something the Fed had not had on its books before.  But various other tools were created or brought out then that have remained, such as quantitative easing.

I supposed another possible one would be the day in late 1973 when indeed Saudi Arabia announced its oil embargo of the US during the Yom Kippur War, which was followed by a massive increase in oil prices, the first oil price shock.  But it was probably the case that such an increase was coming, even if it might have arrived more gradually without that move.  But that move, and the ending of the fixed exchange rate system earlier that year, were arguably the outcome of Nixon's speech a half century ago today.

Barkley Rosser