Five decades ago this month, US President Richard Nixon informed the world that the United States would no longer honor its commitment to exchange US dollars for gold on demand.
The engagement had been the foundation of the international monetary system created in 1944 at Bretton Woods, a conference established to regulate the international financial order after the end of World War II.
This system required each participating state to maintain a fixed face value for its currency in terms of the US dollar. In return, the United States has promised to freely exchange dollars for gold at the agreed price of $ 35 per ounce of gold.
Nixon’s action – announced on August 15, 1971 – had profound and lasting effects on the International Monetary Fund, South Africa and Africa.
Nixon’s decision violated US treaty obligations. But he had little choice.
By 1970, the rest of the industrialized world had accumulated such large dollar holdings that the United States did not have enough gold to keep its gold window open. The situation was likely to continue to deteriorate as, in 1971, the United States experienced its first trade deficit of the 20e century.
In short, the United States lacked the resources to manage the Bretton Woods system on its own.
Five years after Nixon’s decision, IMF member states agreed to end the monetary role of gold and, in effect, move to a market-based floating exchange rate system.
Nixon’s action 50 years ago continues to influence global economic governance. At the time, the ripple effects for southern Africa were also profound.
An unintended consequence was that South Africa, at the time the world’s largest producer of gold, lost its position as a central player in the international monetary system. As a result, the South African apartheid regime has become less important to the Western world. This contributed to South Africa’s complicity with the United States to fight Cubans and Russians who supported the Popular Movement for the Liberation of Angola (MPLA) in their struggle for independence from Angola. .
It also made it easier for other countries to support sanctions against South Africa and, in the 1980s, to oppose future IMF and later commercial bank support to South Africa.
Nixon’s announcement and its aftermath also changed the mission of the IMF.
Change of direction
During the Bretton Woods era, the IMF met annually with each of its member states to establish that they were following policies consistent with maintaining the face value of their currencies. This placed limits on the issues the IMF raised during these visits, as well as the range of officials it was required to consult.
It also meant that, since all member states were part of the same international monetary system, their ability to maintain the face value of their currency was influenced by the same variables. Moreover, given that they were all potentially consumers of the IMF’s financial services – and during this time, all member states dipped into its finances – they should all pay comparable attention to IMF advice.
This was particularly relevant because the conditions that the IMF attached to its financial support were likely to be based on this advice.
The end of the face value system changed all that. If countries had no obligation to maintain a particular value for their currency, what exactly was the IMF supposed to monitor in its annual mission to each country.
The treaty establishing the IMF had been amended. It now simply stipulated that the IMF should ensure that member states contribute to a stable exchange rate system.
This meant that the IMF had to monitor all the factors that could influence the ability of each country to pay all their international obligations and keep the price of their exports competitive. Since almost every aspect of a state’s economy could affect the exchange rate, the IMF slowly began to broaden the range of issues it raised during its annual country visits.
They began to integrate issues such as food subsidies, labor policies, social spending, regulatory policies, trade policy, and the role of the state in the economy.
While IMF surveillance reports were purely advisory, their impact varied depending on the situation in each country. Countries that were wealthy and knew they would not need the IMF’s financial support could easily ignore its advice.
After 1976, no rich country requested funding from the IMF until the European debt crisis in 2010. They thus regained the monetary sovereignty that they had ceded to the IMF at Bretton Woods.
On the other hand, countries that anticipated needing IMF financing or IMF approval of their policies were forced to take the advice seriously. They knew this would determine either the conditions the IMF placed on financial support or their access to other sources of finance.
The result was that after 1976 the IMF became an organization that engaged with member states on a differentiated basis.
Some, knowing that they would not need its services, could engage with the IMF mainly on a voluntary basis. Others, foreseeing that they would somehow need to use the services of the IMF, were forced to treat the IMF with deference, knowing that they had limited capacity to oppose its actions. advice.
Unfortunately, given the IMF’s weighted voting arrangements, this differentiation also meant that states with the dominant voice in the organization were not dependent on its staff. Therefore, they could impose demands on it without worrying about being accountable to those who would be most affected by their decisions.
This was a situation conducive to abuse. For example, during the Asian crisis of 1996, the most influential IMF member states may have refused to support IMF financing for Asian countries unless they adopted economic policies that benefited rich countries.
The IMF also found a new role in the 1980s as a discipline for African, Asian and Latin American countries facing debt crises. It has offered these states some financial support in return for their other creditors by offering them free relief and compliance with various IMF policy conditions. Given the broad scope of the IMF’s mandate, these conditions were both intrusive in the affairs of their member states and in line with the ideological free-market preferences of its wealthy member states.
This resulted, for example, in the controversial structural adjustment policies that the IMF forced African states to follow during this period.
Nixon’s decision marked the end of the United States’ exclusive hegemony over the Western world. It also left the IMF without a clearly defined role. Under the leadership of industrialized countries, it began to forge a new, more intrusive and ideological role as an advisor and financier to developing member states, including in Africa.
Additionally, by freeing exchange rates, Nixon began the process of globalizing finance and creating today’s global economy in which companies make decisions based on short-term financial considerations rather than on the real needs of people and society. – The conversation
Danny Bradlow is Professor of International Development Law and African Economic Relations at the University of Pretoria