Chapter 57 topple the dominoes

〖In order to avoid financial destructive blows, the United States does not hesitate to artificially create an oil embargo, manipulate a large-scale anti-nuclear movement, and create a terrorist atmosphere of economic growth limit, in order to control the world oil circulation and obtain huge benefits from oil premiums. 〗 At the end of Richard Nixon's first year in office, in late 1969, the U.S. economy was once again in recession.By 1970, in order to reverse the sluggish economic situation, the United States lowered interest rates significantly.As a result, speculative "hot money" once again set a new record in the history of the US dollar; in search of higher short-term returns, speculators have transferred funds to Europe and other places.

The U.S. insisted on a policy of not devaluing the dollar, and its reluctance to impose harsh controls on the large, unregulated Eurodollar market, which had lasted for nearly a decade by 1970. One consequence of this policy was that short-term currencies Speculation is increasingly fueling instability.As most bankers around the world know well, even Canute was powerless in the short term [Knut, King of England from 1017 to 1035, who once sat by the sea to recede the tide, but still Clothes were soaked by the waves.He said to those flattering courtiers, although you regard me as king, I can't even hold back the tide. ——Translator].

As a consequence of Nixon's expansionary monetary policy in 1970, the trend of capital inflows in previous years reversed, resulting in net capital outflows of $6.5 billion.However, the US economic downturn remains unchanged.Since interest rates continued to fall after 1971 and the money supply continued to increase, the scale of capital outflows was unprecedentedly large, reaching a total of 20 billion U.S. dollars.Additionally, in May 1971, the United States posted its first-ever monthly trade deficit and triggered panic selling of the dollar around the world.The situation is on the verge of despair.

By 1971, the US's official gold reserves were less than a quarter of its official liabilities: in theory, if all holders of dollars abroad were to convert their dollars into gold, Washington would not be able to meet such a demand unless drastic measures were taken . It was futile for Wall Street to persuade President Nixon not to fight the global rush to exchange dollars for gold.Unfortunately, Wall Street also doesn't want to see the dollar weaken against gold, a goal they've been passionately pursuing for nearly a decade. On August 15, 1971, President Nixon adopted the advice of an internal think tank that included George Schultz, the president's chief budget adviser, and Paul Walker and Jack Bennett, who were then members of the Treasury Department's policy group. He later served as a director of Exxon Corporation.An event that affected the whole world happened in that calm and sunny August. The President of the United States officially announced the suspension of the exchange of the US dollar with gold, and the world completely became the US dollar standard without gold reserves. This move unilaterally tore up the 1944 core agreement of the Bretton Woods system.Holders of U.S. dollars abroad could no longer exchange their U.S. dollars for U.S. gold reserves.

In December of the same year, the United States held dialogues with major European countries, Japan and other countries in Washington.During the dialogue, President Nixon reemphasized his unilateral actions, and the dialogue resulted in a meager compromise, the so-called Smithsonian Agreement.Nixon boasted even more than his predecessor, Lyndon Johnson, when after the Smithsonian negotiations he declared that the negotiations were "the conclusion of the most significant monetary agreement in the history of the world".The U.S. officially lowered the dollar’s ​​value against gold by 8 percent, raising the long-standing $35-to-an-ounce ratio to $38-just as much as her allies demanded.The agreement also formally allows a range of 2.25 percent fluctuations in dollar prices, rather than the 1 percent range previously mandated by the International Monetary Fund's Bretton Woods system.

By announcing to dollar holders around the world that their dollars would no longer be redeemable for gold, Nixon "tipped down" the "dominos" of the world economy, triggering a chain of events that shook the world like never before.Within weeks, confidence in the Smithsonian agreement began to crumble. In 1968, due to the gold issue and his obsession with the rules of the Bretton Woods system, de Gaulle did not cooperate with Washington's policies and launched a resolute confrontation. The IMF's SDR program, designed to hide problems with the dollar, did enough damage.The discontinuation of the dollar's exchange for gold and the consequent international "floating rates" of the early 1970s solved nothing.Just bought some time.

For the United States, there was originally a very good and feasible plan, that is, to set the value of the dollar at a more realistic level.This plan originated in France and was proposed by Jacques Ruyff, the former economic adviser of Charles de Gaulle.He always believed that the US dollar should be positioned at the price of US$70 for an ounce of gold, rather than the price of US$35 for an ounce of gold that the US government insisted on but did not hold.Ruyff said that would not only ease speculation around the world, but also restore balance to the unstable Eurodollar without causing serious disruption to the US domestic economy.Done right, it could also provide a huge impetus to US industrial growth by making exports cheaper in non-dollar terms.The industrial interests of the United States will once again become the mainstream of the domestic financial policy circle.However, this reason is not widely accepted.Wall Street's theory is that their power in the financial sphere cannot be tampered with, even at the expense of economic development or American prosperity.

Gold itself doesn't have much intrinsic value, only some industrial uses.But historically, due to its scarcity, it has acted as a standard of value, according to which different countries have restricted the terms of gold's trading and issued currencies based on gold.When Nixon decided that the U.S. dollar would no longer be pegged to gold, he opened the floodgates, and an unprecedented Las Vegas-style speculative spree worldwide began. After August 1971, the link between long-term economic activities and fixed exchange rate standards changed, and world trade became a speculative arena, where various currency exchange rates fluctuated.

The real makers of Nixon's strategy came from the highly influential commercial banks in the London financial sector. In the summer of 1971, Mr. Sigmund Wahlberg, Eamon de Rothschild, Jocelyn Hambro and others saw extremely Rare opportunity.Once again London was the main center of world finance, again on "borrowed money," only this time in dollars from European banks. After August 1971, the focus of U.S. policy under White House National Security Advisor Henry Kissinger was to control the world economy, not to develop it.American policy officials began proudly calling themselves "Neo-Malthusians." In the developing world in the 1970s, controlling population growth rather than promoting technological transfer and industrial growth began to take precedence, another resurgence of 19th-century British colonial thinking.We will see shortly how these changes take place.

Due to the lack of an effective support base for the Smithsonian Agreement, the situation further deteriorated in 1972, and a large amount of capital flow once again caused the US dollar to flow to Japan and Europe. Until February 12, 1973, President Nixon had to announce the US dollar again. The price against gold depreciated by 10%, and the dollar-to-Federal Reserve gold exchange rate became $42.22 to an ounce of gold, a price that remains to this day. This means that all major currencies in the world have started the so-called "controlled floating" process. From February to March 1973, the exchange rate of the U.S. dollar against the Deutsche Mark devalued again by 40 cents.Since then, currencies have been caught in a never-ending turmoil that hasn't been seen since the 1930s.But this time, strategists in New York, Washington and London are poised to take drastic measures to get the upper hand from the devastating loss of their financial backbone.