50 years since the closing of the “golden window” (part II) – Oped – Eurasia Review


The lasting impact of the Nixon shock

The economic and monetary consequences of Nixon’s decision to end the convertibility of the US dollar into gold are as numerous as they are severe. It marked the start of five decades of monetary and fiscal madness and unleashed an unprecedented borrowing and deficit spending spree. Debt-fueled “growth” has become the name of the game, and currency manipulation has come to define both political strategies and central bank mandates.

The United States, along with most of its Western counterparts, has reached levels of debt that were once considered simply impossible to sustain. Real purchasing power has declined and official inflation figures have only been brought under control through a crude but effective alteration of the CPI formula. Global financial crises have become a part of normal daily life, taken for granted by the public and seen almost as a natural occurrence that is really no one’s fault. Recessions now occur much more frequently, and even if they don’t last as long as they used to be, it is only because they are “corrected” by adding more debt and more incentives to take more risk. .

Overall, this fateful decision by Nixon to sever the last link between a national currency and gold has been the root of most of the serious economic problems we face today. However, the Nixon shock had another effect on the world economy and on modern politics that is vastly underestimated. The move also marked the start of an obvious and shameless politicization of monetary policy.

Nixon’s decision to close the window on gold was motivated by transparent political reasons. He knew full well that a recession could cost him the 1972 election and this was only one attempt in a long series to prevent it. Other strategies included a strong arming of Arthur Burns, then chairman of the Federal Reserve, to cut interest rates, while he also instituted wage and price controls to keep inflation under control. When it became clear that none of these desperate efforts would bring the growth and lower unemployment it needed, he resorted to “brute force”, dismantling the Bretton Woods system.

A slippery slope

While Nixon has been mostly applauded at home for his decision to unilaterally break the US promise to convert dollars into gold, the international reaction has been mainly one of outrage. Back then, it was hard for most people to imagine that political games could get this far in the realm of monetary policy and in such a blatant, cavalier and reckless manner.

And yet, politically speaking, not only has the United States not been punished for it, it has reaped immense benefits from it. It gave the nation an exorbitant advantage, as it cemented the USD as the world’s reserve currency. To date, it is this global demand for dollars for trade, banking and reserves that allows the country to finance its chronic deficit in international trade, as well as to maintain its growing fiscal gap. More importantly, the dominance of the USD has given the nation a vast geopolitical advantage, which to a very large extent explains its position as the world’s greatest superpower.

These huge political gains on the international stage, combined with the freedom to print money at will to pay for crowd-pleasing government expenses, have served as a valuable lesson for the next generation of politicians, not just the United States. , but all over the world. world. It became clear that money can play a much more interesting and useful role if it were placed under the direct control of whoever was in power at the time. It can be manipulated, controlled and deployed as just another policy transmission tool, and it can make impossible promises seem realistic.

From Nixon to MMT

In this light, it is really not at all surprising to see the natural evolution of this line of political thought. It was a slow and gradual process, but over the decades the connection between money and anything tangible faded in most people’s minds. The general financial illiteracy of the general population, the abysmal state of public education, and the near total lack of understanding of monetary history all helped to ensure that very few voices would speak out against the “consensus.” . It is now widely accepted that the government and its central bank control and must have complete control over a nation’s money and that this monopoly is essential to the functioning of the economy.

Given this concession, it is not difficult to see how we have gone even further into economic and monetary surrealism. After all, if the government manipulates the currency is a good thing, why not do more? If inflation doesn’t matter, why the deficits? This is, after all, the main argument behind the increasingly popular modern monetary theory and although it is economically absurd, it is politically perfectly reasonable.

Everything is nestled in the central idea of ​​decoupling money from anything real or tangible and supplanting any value or legitimacy that support would offer with blind faith in government. It has nothing to do with economic forces or with the complex dynamics of the monetary system.

MMT, as well as all the political “nudges” pushing for centralization which preceded it and paved the way, could pose itself as an economic theory, but it is an ideological and philosophical change which figures in the same. political agenda. In this sense, there is nothing new. From time immemorial, leaders and rulers of all stripes have clearly understood that whoever controls the money also controls the people.

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