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50 years after end of dollar’s link to gold: U.S. faces new crisis

By Masao Suzuki

San José, CA – Fifty years ago, on August 15, 1971, then-President Nixon ended the U.S. dollar’s link with gold. This marked a retreat from the economic supremacy of the United States after World War II. Less than four years later, the fall of Saigon marked a defeat for the United States and a turning point in U.S. domination of the developing world.

In 1944 the United States hosted a meeting at Bretton Woods, New Hampshire, to set out a post-World War II economic agreement. At the meeting, the United States’ plan dominated over a British plan crafted by famous economist John Maynard Keynes. This was the end of British imperial financial leadership and the beginning of U.S. financial supremacy. Instead of the fixed exchange rate of the Gold Standard of the late 1800s and early 1900s led by Great Britain, there was now a new system of fixed exchange rates, based on both gold and the U.S. dollar.

This so-called Bretton Woods agreement established fixed exchange rate system that facilitated international trade and investment dominated by the United States. Since the other major capitalist economies – Britain, France, Germany and Japan – were focused on rebuilding after World War II, and because of the socialist Soviet Union, United States saw little economic competition. The United States was the economic power in the world and held most of the world’s gold.

But the recovery of Germany, Japan and other capitalist nations in the 1950s and 1960s put pressure on the U.S.-dollar centered economic system. With other countries holding U.S. dollars to back their own currencies, the United States was supposed to hold gold to back the U.S. dollar. But as doubts about continued U.S. economic supremacy mounted, gold began draining away and finally Nixon had to give up on backing the U.S. dollar with gold in 1971.

This began the modern flexible exchange rate system, where the prices, or exchange rates, of most currencies move up and down in the foreign exchange market. After a period economic instability in the 1970s, the United States was able to stabilize its economy through deregulation and increased exploitation of the working class under President Reagan in the 1980s. But with the Great Financial Crisis of 2008, a new period of relative economic decline for the United States began. In the last 20 years China has grown to be the major economic competitor of the United States. With a socialist economy, China’s gains are also stoking doubts about U.S. capitalism.

The relative stabilization of the U.S. economy in the 1980s and the fall of the U.S.S.R. in 1991 emboldened the United States to be more aggressive militarily, leading the invasions and occupations of Afghanistan and Iraq. But now the United States is trying to reduce its military commitments in the Middle East and pivot to Asia in preparation for a war with China. The Afghan government built and financed to the tune of almost $1 trillion by the United States after the 2001 invasion has collapsed.

The United States economy managed to weather the first wave of the COVID-19 pandemic through massive government borrowing and spending. The total government debt, as compared to size of the economy, is now as large as during World War II. The U.S. central bank, or Federal Reserve, has not only created trillions of dollars to buy U.S. government bonds, but expanded its bond buying to mortgage-backed bonds and other bonds.

But despite the vaccinations of 60% of Americans who are twelve or older, the U.S. economy is again coming under stress with the fourth wave of the COVID-19 pandemic fueled by the Delta variant. One sign of this is the re-emergence of inflation for the first time since before the financial crisis. The looming cut-off of government unemployment aid and eviction moratorium over the next two months will increase hunger and homelessness at a time when economic inequality has increased with the pandemic. While another economic crisis does not appear to be around the corner, the declining strength of the United States around the world points to another period of economic turbulence.

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