A Century of War by F. William Engdahl

Author:F. William Engdahl
Language: eng
Format: mobi
Publisher: Deftones
Published: 0101-01-01T00:00:00+00:00

CHAPTER NINE

Running the world economy in reverse -Who really made the 1970's oil shocks?

Nixon pulls the plug

BY 1969, AT THE END OF PRESIDENT Richard Nixon's first year in office, the U.S. economy was again in recession. U.S. interest rates were sharply lowered by 1970 in order to combat the downturn. Speculative "hot money" began to leave the dollar in record amounts once more, because of the falling interest rates. Higher short-term profits were harvested in Europe and elsewhere.

One result of the almost decade-long American refusal to devalue the dollar, and her reluctance to take serious action to control the huge unregulated Eurodollar market, was increasingly unstable short-term currency speculation. As most of the world's bankers well knew, King Canute could pretend to hold the waves back for only so long.

Richard Nixon turned to an expansionary domestic U.S. monetary policy in 1970. As a result, the capital inflows of the previous year reversed, and the U.S. incurred a net capital outflow of $6.5 billions. But, the U.S. recession persisted. Interest rates continued to drop into 1971, and money supply continued to expand. Capital outflows reached immense dimensions, for that time, totaling $20 billions. In May of 1971, the United States recorded its first monthly trade deficit as well. That triggered a virtually international panic sell-off of U.S. dollars. The situation was, indeed, becoming desperate.

By 1971, U.S. official gold reserves represented less than one quarter of her official liabilities: theoretically, if all foreign dollar holders demanded gold instead, Washington would have been unable to comply without drastic measures.1

The Wall Street establishment persuaded President Nixon to abandon fruitless efforts to support the dollar against a flood of international demand to redeem for gold. But, unfortunately, they did not want the required dollar devaluation against gold which had been intensely sought for almost a decade.

On August 15,1971, Nixon took the advice of a close circle of key advisers which included his chief Budget adviser, George Shultz, and a policy group then at the Treasury Department, which included Paul Volcker and Jack F. Bennett. Bennett later went on to become a director of Exxon. That sunny quiet August day, the President of the United States announced a move which rocked the world: formal suspension of dollar convertibility into gold, effectively putting the world completely onto a direct dollar-standard, with no gold backing. By doing this, the U.S. unilaterally ripped the central provision of the 1944 Bretton Woods system apart. Foreign holders of U.S. dollars could no longer redeem their paper for U.S. gold reserves.

Nixon's unilateral action was reaffirmed in protracted international talks that December in Washington between the leading European governments, Japan, and a few others. The result was a bad compromise known as the Smithsonian Agreement. With an exaggeration which exceeded even that of his predecessor, Lyndon Johnson, after the Smithsonian talks, Nixon announced that they were, "the conclusion of the most significant monetary agreement in the history of the world." The U.S. formally devalued the dollar a mere 8% against gold, placing gold

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