The flutter of a butterfly’s wings can be felt on the other side of the world, they used to say in China to illustrate the infinite relationships of cause and effect in everything that happens. A beautiful phrase that, according to chaos theory, is also correct. But without taking any credit from butterflies or Eastern wisdom, some flutters are felt more than others. Among those who deserve their place in history is the one starring Richard Nixon on Sunday, August 15, 1971, when he announced to the world that the Federal Reserve (Fed) was interrupting the delivery of gold in exchange for dollars. Although he himself did not know it at the time, the former US president was ending a gold standard that, except for a few interruptions, had regulated the international currency system since the 19th century.
The consequences were gigantic. According to Jeffrey Garten, former dean of Yale University and author of the book Three Days at Camp David (Three days at Camp David) on the weekend in which the Nixon announcement was cooked, the globalization that we know today would not have been possible with the corset of the gold standard, which forced nations to manipulate their interest rates to keep currencies within the fixed exchange rates of the previous system. In practice, it meant conditioning the functioning of the entire economy to trade with other countries. As Garten assures Business during a Zoom interview, that was “too politically painful.”
“After the Second War, in the United States we had no problem making the domestic adjustments that were necessary because there was a higher political objective, which was the recovery of Europe and Japan,” explains Garten, who was also responsible for the secretariat of International Trade during the Government of Bill Clinton. As he tells in his book, distinguished by Financial Times as one of the best economics books of 2021, once reconstruction was achieved, the US was left without that political justification and with a trade balance that had ceased to have a surplus to become a chronic deficit due to the good health of European exports and Japanese. Not to mention the high US inflation of those years, which in a fixed exchange regime aggravated that deficit by making imports cheaper and making sales abroad more difficult.
Industries that are losing ground to competitors from other countries and a president that acts unilaterally. The comparison to Donald Trump is as easy as it is wrong, says Garten. It is true that Nixon surprised his allies with temporary tariffs and with the interruption of the exchange of dollars for gold, but he “never thought of reducing trade and capital flows.” Unlike Trump, “her top priority from him was always an open and liberal economic system.”
Although there was a shock Initially, the ultimate goal was to return to agreement with the Allies. “You have to remember that this happened in the Cold War and that with a view to developing countries we had to continue to show that trade and capital flows brought more prosperity than the Soviet model.”
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Does Trump equate to the Nixon of the shock initial and Joe Biden to the Nixon who later recovered the levels of exchange under the new monetary order? “At the moment, that’s not clear,” says Garten. Biden has once again strengthened political ties with Europe, Japan and South Korea, “but in international economic policy he has not made major changes in relation to Trump.” “He is very focused on the recovery of the US economy and that is why he has many policies of more intervention, self-sufficiency and subsidies to local companies,” he explains. “He does it in a more elegant way than Trump, but he’s not that different.”
In his opinion, Biden makes a mistake by drawing a dividing line between political and economic integration. “The US is obsessed with getting tougher on China, but it’s not signing the big trade deals that would give it more leverage against Beijing,” says Garten. In his opinion, it is not just about tariffs, but about harmonizing regulations such as standards to protect data privacy. “If we are not part of that negotiation, we will lose influence in a very important area.”
The problem is that in a good part of the US electorate the idea has been installed that intensifying the commercial relationship with the rest of the world is equivalent to losing income and jobs. According to Garten, a mistaken perception that generated the inability of the last governments to tackle the real causes of the malaise. “What previous administrations have not done, not even that of Biden, is to implement redistribution policies that channel the income of those who benefit most from globalization towards those who are harmed, the problem is not trade but fiscal policy. , taxes and regulation… Trade is essential for the cake to grow, but then you have to redistribute that cake”.
The end of money backed by precious metals and the advent of fiat money ushered in by the Nixon administration came with a revelation: all it takes is for a government to say that a currency is legal tender for other countries to use it as a store of value (although the chosen group of currencies ends up being reduced to those of the countries with greater economic power).
With technology blockchain, it is the users themselves who support the value of cryptocurrencies, will that be the next revelation? According to Garten, no one can know yet. “What I can say is that governments have to work on digital currencies issued by their central banks, because that is going to happen; what nobody knows yet is what it will mean for the dollar and for international transactions”. Another fundamental measure is to regulate cryptocurrencies as soon as possible and in the most coordinated way possible. “They can get to a level where, if they crash, they will do collateral damage to the entire financial system; It’s not going to happen today, but it could happen in the next five years.”
In 1971, all central banks knew that the US had issued more currency than it could back with its gold reserves, but no one acted until Nixon suspended dollar convertibility on August 15. An elephant in the room, following the Anglo-Saxon proverb, of which no one dared to speak. What is the elephant in the room of 2022? “Our enormous vulnerability to natural disasters,” says Garten. “We have already seen it with public health, but what is going to create climate change is going to be much faster than our global economy can assimilate, that is our elephant in the room, we are all seeing it, but we continue without the political will to confront it.
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