Nixon shock

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Richard Nixon (1971)

Two political decisions made by the American government in 1971 about changes in American foreign and economic and financial policy during the reign of President Richard Nixon became known as the Nixon Shock . Nixon announced both of them completely surprisingly.

The foreign policy decision led to far-reaching changes in the relationship between the United States and the People's Republic of China and the Republic of China ; Relations between the PRC and Japan also changed significantly.

The monetary policy decision had the effect that the world monetary system of Bretton Woods with its fixed exchange rates no longer worked (“collapse”, “collapse”); a phase of freely floating exchange rates began.

Background information

The Bretton Woods system had three problems:

  • Lack of credibility: The value of the dollar as an anchor currency should be ensured by the fact that the central banks of the participating States to the Fed had the right to exchange dollars at an exchange rate of $ 35 / oz in gold. The actual exchange option depended on the FED's gold reserves. In 1948 the FED had gold reserves valued at $ 25 billion (71% of world gold reserves) compared to short-term foreign debt of $ 18.6 billion. After the Second World War , almost all of the Bretton Woods states had a lot of catching up to do in terms of capital and consumer goods, so they preferred to amass dollars rather than exchange dollars for gold. Due to constant trade deficits in the United States, the external debt continued to rise. In 1961 the FED still had 44% of the world's gold reserves, but its short-term foreign debts were already $ 1 billion higher than the value of the gold reserves. By 1971 the US gold reserves had sunk to $ 12 billion. The central banks of the other Bretton Woods states had dollar reserves of more than $ 50 billion in 1971. The system could only work as long as the Bretton Woods states were willing to hold large dollar reserves without exchanging them for gold.
  • Lack of flexibility: The Bretton Woods system was a regime of fixed exchange rates with the dollar as the anchor currency. This meant that the monetary policy of the United States had an effect not only in the United States but in all Bretton Woods states, because the other Bretton Woods states had to maintain the fixed exchange rate between their currency and the dollar. Towards the end of the 1960s, the USA pursued an expansive monetary policy (due to the Vietnam War and a period of economic weakness) . Some other Bretton Woods states, on the other hand, wanted to pursue a more restrictive monetary policy.
  • Growing opposition: In the early 1970s, the financial sector began to speculate against the dollar. The Bretton Woods countries finally gave up the defense of the fixed exchange rate because they did not want to accumulate ever higher dollar stocks. Economists around Milton Friedman campaigned for a transition to flexible exchange rates and thus for an end to the Bretton Woods system.

The shock

On July 15, 1971 , Nixon announced the resumption of diplomatic relations with the People's Republic of China and the associated breakdown of relations with the Republic of China . This came as a surprise to the entire world, as it represented a fundamental reorientation of American foreign policy in the Pacific and towards the largest communist regime. This development was particularly surprising for Japan's closest ally, as diplomatic agencies or the Japanese government did not have any prior publication the decision were informed. The policy practiced in the following years is often referred to as ping-pong diplomacy , as it actually led to rapprochement between the two countries - with a certain amount of table tennis. Remarkably, this dialogue began precisely at the World Table Tennis Championships in Nagoya (Japan).

The second decision of particular importance was announced by Nixon in a speech to the public a month later on American television and radio on Sunday, August 15, 1971 in the evening. He declared a period of 90 days for fixing wages and prices domestically and for imposing an import duty of 10 percent on imported goods. The biggest impact was the abolition of dollar convertibility into gold with the closing of the gold window at the US Federal Reserve, which resulted in the end of the Bretton Woods system of fixed exchange rates. Both events are referred to both separately and collectively as the “Nixon shock”, since they were decided and announced exclusively by the White House without consultation with other nations .

“We need to protect the US dollar's position as a pillar of monetary stability around the world. For the past seven years, there has been an international currency crisis on average every year. Who benefits from such crises? Not the worker, not the investor, not the real producers of assets. The winners are the international money speculators. Because they live from crises, they help create crises. In the past few weeks speculators have started a war by all means against the American dollar. The strength of a nation's currency is based on the strength of its economy - and the American economy is by far the strongest in the world. Accordingly, I have instructed the Treasury Secretary to take the necessary steps to defend the dollar against speculators. I have directed Treasury Secretary Connally to temporarily suspend the convertibility of the dollar to gold or other reserves, except on amounts and under conditions deemed to be in the interests of monetary stability and in the best interests of the United States. [...] This move will not make us friends among international money dealers, but our primary concern is American workers and fair competition around the world. [...] I am determined to ensure that the American dollar will never again be a pawn in the hands of international speculators. "

- US President Richard Nixon, in a radio and television address on August 15, 1971

The three levels of impact

The resolutions of the American president, published within four consecutive weeks, had an impact on three levels. Domestically, they found great enthusiasm and allowed the citizens surveyed to agree to the measures to swell to 90 percent. In 1972 Richard Nixon was elected president for the second time. In economic terms, the successes were short-lived, inflation rose again and the unemployment rate did not fall as expected. As early as June 1973, a price setting was decided again, which, however, did not bring the previously shown successes.

In terms of foreign policy, this reorientation towards the People's Republic of China gave rise to doubts about the sustainability of Japan's security interests under the shield of the nuclear power America, which had been announced by Nixon in Guam in July 1969 and under the term Nixon Doctrine (also: Guam Doctrine ) are known. While contact with Prime Minister Satō Eisaku seemed very open in the early years of the Nixon government and brought political success, the time may have come for Japan to rethink its position in the world. In the years that followed, there were repeated conflicts in diplomatic relations between America and Japan , both economically and at the level of security policy.

A new era dawned in relation to the People's Republic of China. The invitation and Richard Nixon's visit to China in 1972 were seen as the first major sign of the new politics. Here Richard Nixon showed himself very differently than in the time of 1969 and 1970, when he wanted to intimidate the enemy in Vietnam with the tactics of the unpredictable president - known as Madman theory ( English "Madman theory" ).

Japan's political changes of direction

Under the Japanese Prime Minister Satō Eisaku , the USA and Japan had achieved a clear rapprochement and agreement, which, however, was strongly questioned with the change in the American-Chinese relationship. It was discussed across all political groups whether the treaty on mutual cooperation and security between Japan and the United States would guarantee the security of Japan without restrictions. Shortly before the two Nixon shocks, Tanaka Kakuei became MITI minister. He recommended Japanese companies after the Nixon shocks don't miss the boat to China . In 1972 he became the new Prime Minister of Japan and, even after his resignation in December 1974, remained one of the country's most influential politicians for a long time. In terms of foreign policy, the Tanaka era was shaped by rapprochement with the People's Republic of China. Japan was looking for a repositioning in the often very tense relationship with the People's Republic of China, and efforts were evidently made to improve Japanese-Chinese relations . In a first step, the resumption of Japanese-Chinese diplomatic relations was agreed. Negotiations on a peace treaty began, which showed an initial great success with the joint declaration (Joint Communiqué) of September 29, 1972 and which culminated on August 12, 1978 with the signing of the peace treaty between Japan and the People's Republic of China . The long phase in between was marked by the attempt by the Chinese government, led by Mao Zedong , to transfer the conflict between the PR China and the USSR to Japanese politics, the ultimately unsuccessful attempt by Japan to neutralize this issue and a nearby sea incident the Senkaku Islands , which dealt with the territorial issue of this group of islands - the focus of a conflict that is still ongoing today (December 2013).

Aftermath to the present

Since the 1990s, many countries have been demanding that the People's Republic of China also make their national currency, the Renminbi , freely convertible, since it is kept artificially low by the state in order to promote export growth. Haruhiko Kuroda describes from the experiences of the Nixon shock, the Plaza Agreement and the Asian crisis , how the Chinese government could avoid economic risks based on the experiences at that time and how free trade in the currencies of the economically leading nations would be guaranteed. According to David McNally's considerations , the end of the Bretton Woods system and the increase in freely convertible currencies led to the need for hedging mechanisms, in which credit default swaps also played an essential role. This financial instrument as well as the rapidly increasing influence of the financial sector would then be the main causes of the global financial crisis in 2007 .

literature

  • Glenn D Hook, Julie Gilson, Christopher W Hughes, Hugo Dobson: Japan's International Relations. 2nd Edition. Routledge, New York, 2005.
  • Ming Wan: Sino-Japanese Relations: Interaction, Logic and Transformation: Washington: Woodrow Wilson Center Press. Stanford University Press, 2006.
  • Michael G. Green, Patrick M. Cronin: The US - Japan Alliance: The Council on Foreign Relations. Brookings Institution Press, New York 1998.
  • William T. Tow et al. (Ed.): Asia-Pacific Security. US, Australia and Japan and the new security triangle. Routledge, London et al. 2007.

Web links

Wikisource: Executive Order 11615  - Sources and full texts (English)

Individual evidence

  1. ^ Robert L. Hetzel: The Monetary Policy of the Federal Reserve: A History. Cambridge University Press, Cambridge 2008.
  2. ↑ Larry Allen: The Global Economic System Since 1945. Reaction Books, 2005, ISBN 1-86189-242-X , pp. 82, 83.
  3. ^ Larry Allen: The Global Economic System Since 1945. Reaction Books, 2005, ISBN 1-86189-242-X , p. 87.
  4. ^ Nigel Bowles: Nixon's Business: Authority and Power in Presidential Politics. Texas A&M University Press, 2005, ISBN 1-58544-454-5 , p. 163.
  5. ↑ Bretton Woods System. In: Gabler Wirtschaftslexikon. Springer Gabler Verlag.
  6. ↑ Cynthia L. Clark: The American Economy: A Historical Encyclopedia. ABC-CLIO, 2011, ISBN 978-1-59884-462-7 , p. 406.
  7. ^ Nigel Bowles: Nixon's Business: Authority and Power in Presidential Politics. Texas A&M University Press, 2005, ISBN 1-58544-454-5 , pp. 163 ff.
  8. ^ A b Daniel Yergin, Joseph Stanislaw: Nixon Tries Price Controls. In: The Commanding Heights: The Battle for the World Economy. 1997, pp. 60-64 , accessed June 9, 2011 (English).
  9. ^ Douglas H. Mendel, Jr .: Japanese Views of Sato's Foreign Policy: The Credibility Gap. In: Asian Survey. Vol. 7, No. 7, Jul 1967, pp. 444-456, Published by University of California Press
  10. ↑ Edwin O. Reischauer: The Japanese. Belknap Press, 1977, ISBN 0-674-47178-4 .
  11. ↑ Chalmers Johnson: MITI and the Japanese Miracle . Stanford University Press, 1982, ISBN 0-8047-1206-9 , p. 292. (online)
  12. ↑ Haruhiko Kuroda: The "Nixon Shock" and the "Plaza Agreement" Lessons from Two Seemingly Failed Cases of Japan's Exchange Rate Policy . In: China & World Economy . Vol. 12, No. 1, 2004, p. 3–10, (English, PDF ( memento of October 8, 2010 in the Internet Archive ) [accessed June 9, 2011]).
  13. ^ David McNally: From financial crisis to world-slump: accumulation, financialization, and the global slowdown. In: Historical Materialism. 17, 2009, pp. 35-83, Published by Brill for the University of London.