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August marks the 50th anniversary of a momentous event: Richard Nixon, then the US president, summoned his advisers to Camp David. The subject of discussion wasn’t war or foreign policy.
They were there to take the collective decision to sever the dollar’s link with the gold standard, the system whereby the US government had pledged that each dollar could be exchanged for gold (at a rate of $35 an ounce), and other currencies, such as the British pound or German Deutsche Mark, were pegged to the dollar.
At the time, it was shocking: the gold standard was replaced with a system of floating exchange rates, where dollars were no longer backed by gold.
The details of those extraordinary policy deliberations are not well known. Indeed, until Yale law professor and former US undersecretary of commerce Jeffrey E Garten published his book Three Days at Camp David there was no comprehensive account available. Garten has done us all a service with his chronicle, and it is especially worth pondering now for at least three reasons.
First, when Nixon called this meeting he was grappling with a variant of the same problem that haunts president Joe Biden: a clash between the rhetoric about America’s global status — that the US leads it — and reality — that America’s ability to do so is constrained. Garten writes of his account of Nixon that it “is, above all, an account of how the United States began to rethink its role in the world”.
Second, this clash between rhetoric and reality was particularly pronounced in 1971, because of the crucial problem that America simply did not possess enough gold to honour dollar claims. And that issue raised a bigger question that always stalks finance: what is the basis on which money commands value and trust?
To explain why, it’s useful to start with a point taught in Economics 101. There are essentially two ways for money and a financial system to command credibility — sadly, both options are beset with flaws.
David Graeber, a former anthropology professor, described this well in his book Debt, The First 5,000 Years. He notes that at some points in history, money has gained its value either because it was a commodity in limited supply or was tethered to one. This was the case before 1971, with the gold standard. It’s also the principle that drives cryptocurrencies. Supply is limited, or so the sales pitch goes.
On other occasions in history, however, the value of money relies on the credibility of an individual, institution or group. That is the world we live in now. “Once the global system of credit money was entirely unpegged from gold, the world entered a new phase of financial history,” Graeber notes. The value of the dollar now depends on whether we think the Federal Reserve will protect the currency (say, by curbing inflation) and other investors will believe it can do this (ie keep buying dollars).
Both systems carry the seeds of their own demise. A system built around supply constraints creates value by being rigid by design. But as economist Barry Eichengreen writes in Golden Fetters, that lack of flexibility can also cause it to implode. This is what happened in 1971. To simplify: in the postwar years, like a child outgrowing a pair of shoes, the global economy outgrew the financial framework created in 1944, forcing Nixon to act.
With the second system, however, there is the reverse problem: excessive flexibility. Most notably, since governments can create money and debt at the stroke of a pen, they are often tempted to do this for reasons of political expediency, causing debt to balloon.
And, as Graeber notes, history shows that this ballooning process usually leads to a social explosion or a direct or indirect restructuring of the debt via inflation, financial controls or write-offs. In ancient Mesopotamia, rulers periodically “wiped the [clay] slates clean” that recorded loans, to create debt jubilees to avoid rebellions.
The question now is whether this historical pattern plays out in today’s monetary system. I expect it will. The total global debt is now more than three times the size of the global economy, since debt — and money — has expanded inexorably since 1971. It seems most unlikely this can ever be repaid just by growth; sooner or later — and it may be much later — this will probably cause a direct or indirect restructuring or a social or financial implosion.
This brings us to the third reason why Garten’s account matters. Right now, it seems hard to imagine any restructuring of western debt, or reordering of our political economy. No wonder: humans usually assume their practices are natural and inevitable. But Garten’s book shows that the concept of monetary “normal” before 1971 was very different from today; before then, nobody thought money had value because an independent central bank had an inflation target.
So, on the eve of this Camp David anniversary, it is worth pondering how different “normal” might look in another 50 years? Will it involve cryptocurrencies? Treasury departments running central banks? Or something else? Just don’t make the mistake of assuming that “normal” will be identical to today.
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