How The US Became The World Bank
Began the global monetary system and fiscal policy in the U.S. change in the years of the sixties of the last century. The Conference of the United Nations Monetary and Financial, which was held in Bretton Woods, New Hampshire in the United States in the month of July of 0.1944 set fixed exchange rates to the dollar supported gold and achieved a success for years, but this success did not last long.
By 0.1960 exceeded the dollar holdings of foreign reserves of gold in the United States. The country was such as a bank in the 19th century papers issued monetary than what they have of gold coins in the treasury.
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In the U.S. presidential elections that year, decided by the Vice-President Richard Nixon and John Kennedy, the senator stressed the importance of maintaining gold reserves, which is an essential element of national power and national security of the country. As President Kennedy later: "The British have nuclear weapons, but the pound is weak, so I do not care about it around them. The Spanish people is very nice? Not because he does not have nuclear weapons, but has gone up well. "
Says Simon Johnson and James Kwak, two of the economic experts and authors of the book "Bankers 13" and the founders of the blog "Peace Line" scenario specializing in economic and public policy. And Simon Johnson is also a columnist for the site Bloomberg Economic and served as chief economist at the IMF in 2007 and 2008 in the new book for them, "Burn the White House: Founding Fathers, religion, American National, why is it important to you," which was published on 3 April / April.
Began to drain gold and foreign central banks turned to the dollar demand for gold, which led to a large deficit in the U.S. budget. And feared to increase aggregate demand for dollars, in addition to increasing imports, sending dollars overseas, leading to an increased flow of gold over to the outside. But presidents must achieve a balance between many priorities, and John F. Kennedy was no exception. If the gold reserves are important, the Cold War was more important, so I chose John F. Kennedy increased military spending.
Sustainability of economic growth was also a top priority, and the Kennedy administration was first embraced the philosophy of deficit spending as a tool to manage the economy. In the thirties of the last century, the British economist, "John Maynard Keynes," the first to introduce the theory of stimulating economic recession by increasing government spending or tax cuts would lead to an abundance of money in the hands of the people, and high aggregate demand and increase economic activity.
Kennedy's advisers were confident that it can use the Keynesian theory of economic management by increasing the deficit during periods of economic slowdown and reduction during periods of prosperity.
For the first time in American history, the President raises the idea that the budget deficit could be a good thing, and need not be used or applied only in cases of military or economic emergency.
Kennedy found a successor, President Lyndon Johnson, that there are some things more important than a balanced budget, in the face a choice between guns and bread, he chose both. Johnson oversaw America's commitment to expensive war in Vietnam, and the expansion at the same time in the local social programs to fight poverty.
Spending is not the only cause of attrition in gold, but also contributed to inflation in the flow of gold abroad. Inflation was in favor of the budget of the U.S. government, where it became the Government of the United States President debtor after the World War, and benefited from inflation, such as a debtor. Inflation was modest, but continuous with the organization of real interest rates and inflation-adjusted. Inflation as part of the debt since he was also of interest payments to creditors were not keep up with inflation and helped the spending on the Vietnam War in the production of a budget deficit during the years of the sixties.
Shares of the budget deficit as well as the emergence of inflationary pressures in the deterioration of the appetite of foreign central banks for the dollar. These banks began to feel concerned about whether they will be always able to take advantage of the price of $ 35 per ounce of gold, and set off a wave of buying gold in March 1968. It was not for the negotiations to re-exchange rates, which would slow the flow of the dollar abroad, to little effect. It was possible to protect the U.S. reserves of gold, but only to the detriment of the economy - which is the price of U.S. presidents refused to pay.
Thus, the United States Bank of the world, and faced wide range of operations and the withdrawal of deposits. Came the moment of collapse on August 11 / August of 1971, when he took President Nixon's advice and Treasury Secretary John Connally Secretary and closed the gold window, refusing to convert the dollar into gold and give up the Statute of the resolutions of the "Bretton Woods" for 1944 at a fixed rate to the dollar backed by gold.
Was announced this shift in U.S. economic policy as a new economic policy, and Nixon added some tax cuts, and reduce the number of federal employees, and froze wages and prices for 90 days, and impose a 10 percent temporary tax on imports. So ended the era of gold finally.
After Nixon closed the gold window, the value of the dollar against other currencies, but could not keep the new exchange rate against the other draws on the dollar in 1973. Renounced the world for fixed exchange rate system in favor of a floating price that determines the value of the currency by supply and demand, the dollar has depreciated more, according to Time magazine at the time, "banana republic, only that reduce the value of its currency twice within 14 months."
But countries are still in need of reserves to intervene in foreign exchange markets, and there is a marked shift away from the dollar as a reserve currency. In in 1977, the dollar still accounts for about 80 percent of the total foreign exchange reserves that have been identified, and increased dollars abroad in official reserves about 1.91 billion dollars from 1975 until 1981.
Seventies of the last century were difficult years for the United States, especially with rising inflation and the weak dollar. But not kept pace with the end of a system of "Bretton Woods" high rates of inflation permanently, as expectations were. He also stressed Paul Volcker, after he became president of the Federal Reserve in 1979 monetary policy, at the expense of high rates of unemployment, and managed to control inflation.
The test came the next president of the United States in the years of the eighties. Ronald Reagan won the presidential election in 1980 promising to cut taxes, strengthening national defense and to balance the budget by cutting government spending. The initiative of President Reagan first is to convince Congress to cut income tax rates in all areas, with Traha the highest rate of 70 percent to 50 percent. Resulted in the largest tax cut in history as well as a severe recession in 1981-1982 to a decline in government revenues from 6.19 percent of GDP in 1981 to 3.17 percent in 1984.
At the same time, increased government spending, thanks to the increase in the defense budget, which produced the largest budget deficit in peacetime in history. Make this deficit, in addition to the growing current account deficit, the United States - whether the federal government Oalqtaa sector - increasingly dependent on borrowing from other countries.
Under the regime of "Bretton Woods", this borrowing represents a serious problem. Borrowing from abroad depends on the willingness of foreign investors to hold dollars or dollar-based assets, which requires confidence in the value of the dollar. But the more accumulated more dollars with these investors, they have dropped the faith that the United States will be able to maintain the gold standard at $ 35 per ounce, so the whole system collapsed.
After the "Bretton Woods", is still every country in the world are in need of reserves of foreign currencies to facilitate international trade, and the dollar is still the reserve currency of choice. Helped the huge deficit in the budget in the years of the eighties the last to raise interest rates in the United States, which made the dollar more attractive to international investors. No longer convertibility into gold is a matter for concern.
At that time, he wondered, economists and others to any extent we can continue to the large budget deficit and current account deficit. And became enthusiastic about the speech deficit Almizanana is constant and continuous in Washington. In 1990 and in 1993, prompted President George HW Bush and Bill Clinton legislation lead to spending cuts and tax increases. It also reduced the budget deficit during this decade and gained a good reputation America for the growth of stable and low inflation, and the dollar became more attractive.
The New World, put a big risk. Years in the nineties, foreign capital rushed to the newly industrialized countries in East and Southeast Asia, which led to the economic boom has caused a rapid rise in asset prices and currency values. Cheap money and encouraged the companies to borrow heavily to invest in risky projects, even had a boom can not continue without the infusion of new capital.
The Asian crisis
Presented the International Monetary Fund, which is the product of the "Bretton Woods", emergency loans for a number of Asian countries during the crisis. These funds came with many conditions that have made the International Monetary Fund does not have any popularity in certain parts of the world, reinforcing the stigma associated with borrowing from the International Monetary Fund has grown over the decades. The lesson for many of the countries with emerging markets, they do not want to Atdtroa never to borrow from the IMF again.
There were no attempts to prevent the private sector to borrow foreign capital more than necessary, only limited success. The central banks all over the world to protect themselves by building large war funds. Some countries, particularly China, the accumulation of the dollar as a means to suppress the value of their currencies. Given the huge Chinese trade surplus with the United States and a surplus of dollars, but if the yuan traded them on the open market, this would increase the value of the yuan, which makes it difficult for them to export goods. Instead, China is investing those dollars in U.S. Treasury securities and other assets denominated in dollars.
In the end, the instability in the global economy increases the demand for safe assets, and there is so far nothing more secure than the assets of U.S. Treasury bonds. But how long it will continue to exceed the dollar, and what happens to the sustainability of U.S. budget deficit When this superiority?