Expert opinions

50 years without a gold standard: what next?

Fifty years ago, on August 15, 1971 (by the way, it was also a Sunday day), US President Richard Nixon announced the cessation of the exchange of dollars for gold. Thus, the United States actually announced its intention to withdraw from the Bretton Woods Agreement. This event itself received a historical name — “Nixon shock.” What did it mean for the further development of the world economy? What are the consequences? Moreover, what lessons should we learn from it?


Expected surprise

 Largely, it was with the “Nixon shock” that the latent, but clearly pronounced and dynamic process of globalization began the formation of a polycentric world economy, with the resulting aggravation of international competition in commodity, financial and foreign exchange markets. The Bretton Woods Agreement is a forced and consequential instrument of the Second World War. The United States was vitally interested in it. The entire developed pre-war world lay in ruins, and US economic development would simply not be possible without the simultaneous restoration of the economies of Europe and Japan. Under these conditions, the dollar, as the only currency with a gold equivalent, became the stabilizer of the restored production, financial, and trade relations. Of course, one should not exaggerate Americans’ concern for the fate of the world, but their economic selfishness served the interests of individual recovering countries, and the world economy as a whole. The refusal to exchange the dollar for gold was the final signal of the completion of the post-war economic recovery.

The history of the world currency system has millennia — and the trend of dematerialization of payment means clearly emerges through them. Formal periodization of the rejection of the gold standard took decades. In fact, after World War II, such an anachronism could not exist for a long time. No national currency can be better than all others. Long before 1971, experts, scientists, in particular the founder of monetarism, Milton Friedman, openly declared the inefficiency of pegging rates to the dollar, and moreover to gold. The transition to flexible courses was enshrined in the 1976 Jamaica Agreement. However, before that, the same Great Britain, Germany, and Japan devalued currencies, which strengthened their position in the struggle for world markets and supported the trade expansion of their goods.

In the late 60s — early 70s, very active rounds of trade negotiations took place within the framework of the GATT on tariff and non-tariff protectionism measures and other preferences. The number of countries struggling for free trade to enter new markets has grown. Changing, flexible rates of national currencies could become one means of competition. The decision made at Camp David on August 15, 1971 to stop the exchange of the dollar for gold is now perceived as a “shock,” but only because, as Nassim Taleb wrote, people are often fooled by chance. Although the event was deterministic.

Interesting memories belong to Leo Melamed, then head of the Chicago Mercantile Exchange. In advance of what happened, he was preparing to launch the currency futures market, that is, to start trading the risks of currency exchange rates. The idea of flexible exchange rates determined by market mechanisms was in the air. And it materialized.

Nothing is perfect

Yes, it was a difficult process, but a flexible currency balancing mechanism appeared that supported global investment and trade expansion.

Did the United States benefit from this? Adapting to the new conditions was not easy. The 70s are filled with many dramatic events in the world economy: crises, oil shock, stagflation. Of course, causal relations should not be exaggerated, but the factor of changing the rules of the currency system also played a role. The US managed to use the situation in its favor, first of all, probably because it concentrated financial resources and took a leading position as a financial center, which began to be able to pass through gigantic flows of world capital and, in fact, influence pricing in many commodity positions, including national currencies. The United States began to determine global investment flows.

Thanks to a system of flexible exchange rates, the entire world economy has formed. However, the advantages have the property of turning into disadvantages. The period of economic expansion based on flexible exchange rates has led to the fact that the United States could not maintain absolute leadership in the global world. They, becoming the leader of globalization, created competitors for themselves. The trade surplus was replaced by a huge negative balance; the US economy depends on many countries of the world that have their own economic selfishness. Europe remains an important competitor for the United States, primarily Germany.

But it’s China that has become and still remains the main competitor for Americans. Chinese economy is built in the logic of globalization. China benefits from flexible rates: we saw in some periods how the Central Bank of China used currency mechanisms to advance the country’s economic interests. This was the reaction of China to the trade war declared by former US President Donald Trump, but the mechanism itself was used earlier. Trump openly accused China of manipulating the national currency.

More importantly, the developed WTO member countries are now raising the question that the preferential status of some developing countries that have grown long ago out of this conditional framework should be reviewed. This already indicates the collective concern of the highly developed powers regarding competition from the virtually new developed countries, such as India, China and Brazil. Flexible exchange rates and the dominance of the dollar as a world currency do not interfere with them at all: they enjoy all the benefits of the current system. Like 50 years ago, the need for changes in the current state of affairs is in the air. Change is inevitable, and Trump’s trade wars were only the first breakdown of strength, and not at the whim of an eccentric character.

Yuanization vs. dollarization?

 We must understand: the prospects for the potential yuanization of the world currency system instead of its current dollarization do not look so fantastic. Economic conditions may be said to be ripe for it; the matter is the political choice of the world’s largest exporter. Such a development can significantly hurt US economic interests, and not only economic ones, given how much China already invests in developing countries and what financial assistance it provides to them.

Certain political and economic circles in the United States clearly understand this. Trump was the exponent of their sentiments. His activities as president of the United States can be evaluated in different ways. However, in recent years, it was a politician who especially persistently and harshly pushed American-centric changes into the current economic world order, including the currency one. All new trade agreements signed by him (with Canada and Mexico, with China) in one form or another contain clauses on the refusal to manipulate foreign exchange rates. Economists close to the Trump camp talked about returning to the mechanisms of tighter binding of exchange rates of trading partner countries. And his candidate for the board of directors of the Federal Reserve, Judy Shelton, who did not receive support in Congress, almost openly advocated a return to the gold standard. If Trump could stay for another four years, we would probably hear from Washington an open call for a new reform of the world monetary system. The main focus of the attack would most likely be the yuan, then the euro, not to mention the currencies of less developed countries.

The new owner of the White House and his administration, apparently, decided to shelve Trump’s tough scenario. However, notwithstanding any tactics, US — China economic contradictions and competition have not gone anywhere and have not become less. They will still remind themselves one way or another. Therefore, it is possible that in three years the radical mood “to make America great again” may again intensify in the United States. And the issue of the monetary system may not be at the last place in the general discussion. In this field, the main battles of China and the United States can unfold.

Russia, which is integrated into the global economy, needs to be alert: it is necessary to diversify foreign economic relations, the use of currencies, not even because of the threat of sanctions. It is premature to talk about complete and significant de-dollarization, but the diversification of foreign exchange relations will gain momentum. And the role of other currencies, as well as the strength of national central banks, the scale of world trade, and the economic selfishness of the newly developed countries – all this will affect the exchange rates, world trade and financial stability of Russia. Clearly, there will be changes in the global monetary system; you need to be prepared to minimize the negative consequences of future trends.

By Vladimir Milovidov, Deputy Director of the Institute of World Economy and International Relations of the Russian Academy of Sciences (IMEMO), Head of the Department of MGIMO University by the Ministry of Foreign Affairs of the Russian Federation

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