US President Richard Nixon’s decision to end America’s promise to turn dollars into gold changed the global financial system. fake pictures
Danny Bradlow, SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria .
This month, five decades ago, 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 compromise 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 few options.
By 1970, the rest of the industrialized world had accumulated such large dollar holdings that the United States did not have enough gold to credibly keep the gold window open. The situation is likely to continue to deteriorate because in 1971 the United States experienced its first trade deficit of the 20th century.
In short, the United States lacked the resources to administer 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 floating exchange rate market 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 gold producer, lost its position as a central player in the international monetary system. As a result, the apartheid regime in South Africa has become less important to the Western world. This helped South Africa come to an understanding with the United States to fight the Cubans and Russians who supported the Popular Movement for the Liberation of Angola (MPLA) in their struggle for independence from the 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.
IMF change of course
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 limited the questions the IMF would raise during these visits, as well as the range of officials it needed 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, since they were all potential consumers of IMF financial services, and meanwhile all member states were looking to their finances, they should all pay similar attention to IMF advice.
This was particularly relevant because the conditions that the IMF imposed on its financial support would likely be based on this advice.
The end of the face value system changed all that. If countries weren’t required 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 established by the IMF has been amended. Now it was limited to stating 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 its international obligations and keep the price of its 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 incorporate topics 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. It thus regained the monetary sovereignty that it 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 the conditions the IMF placed on financial support or their access to other sources of finance.
Towards a differentiated world
The result was that after 1976 the IMF became an organization that engaged in different ways with member states.
Some, knowing that they would not need their services, could work with the IMF mainly on a voluntary basis. Others, foreseeing that they would somehow need to consume IMF staff, were forced to treat the IMF with deference, knowing that they had limited ability to oppose its policies. advice.
Unfortunately, given the modalities of weighted voting at the IMF, this differentiation also meant that the states with the dominant voice in the organization were not dependent on its services. As a result, they could make demands on you without worrying about being accountable to those who would be most affected by their decisions.
It was a situation conducive to abuse. For example, during the Asian crisis of 1996, the most influential IMF member states might refuse to support IMF financing for Asian countries unless they adopt economic policies that benefit rich countries.
The IMF also found a new role for itself in the 1980s as a discipline for countries in Africa, Asia and Latin America facing debt crises. It has offered these states some financial support in return for their other creditors offering them additional relief and compliance with various IMF policy conditions. Given the broad scope of the IMF’s mandate, these conditions were intrusive in the affairs of its member states and in line with the free-market ideological 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.
Long term impact
Nixon’s decision marked the end of America’s exclusive hegemony over the Western world. It also left the IMF without a clearly defined role. Under the leadership of industrialized countries, he began to shape a new, more intrusive and ideological role as an advisor and financier to developing member states, including in Africa.
Moreover, by freeing exchange rates, Nixon initiated the process of globalization of finance and the creation of today’s global economy in which companies make decisions based on short-term financial considerations rather than on the real needs of people and the economy. company.
This article was republished from The Conversation under a Creative Commons license. Read the original article.
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