On the afternoon of Friday 13th August 1971 Richard Nixon decided to close “the gold window” so that “foreign governments could no longer exchange their dollars for gold.”
On the afternoon of Friday, August 13, 1971, these officials along with 12 other high-ranking White House and Treasury advisors met secretly with Nixon at Camp David.
There was great debate about what Nixon should do, but ultimately Nixon, relying heavily on the advice of the self-confident Connally, decided to break up Bretton Woods by suspending the convertibility of the dollar into gold; freezing wages and prices for 90 days to combat potential inflationary effects; and impose an import surcharge of 10 percent.
To prevent a run on the dollar, stabilize the US economy, and decrease US unemployment and inflation rates, on August 15, 1971:
1. Nixon directed Treasury Secretary Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold.
2. Nixon issued Executive Order 11615 (pursuant to the Economic Stabilization Act of 1970), imposing a 90-day freeze on wages and prices in order to counter inflation. This was the first time the U.S. government enacted wage and price controls since World War II.
3. An import surcharge of 10 percent was set to ensure that American products would not be at a disadvantage because of the expected fluctuation in exchange rates.
The following year I went to college to be schooled in the mysteries of Political Economy.
It was a hoot.
The historians were busy trying [and failing] to rewrite Settled History.
To buy time the history lecturers focussed upon the industrialisation of Russia but studiously tried to avoid any mention of politics, Marxism-Leninism and the Russian Revolution of 1917.
The Russian Revolution is the collective term for a series of revolutions in Russia in 1917, which dismantled the Tsarist autocracy and led to the creation of the Russian SFSR.
The Emperor was forced to abdicate and the old regime was replaced by a provisional government during the first revolution of February 1917
In the second revolution, during October, the Provisional Government was removed and replaced with a Bolshevik (Communist) government.
The October Revolution was led by Vladimir Lenin and was based upon Lenin’s writing on the ideas of Karl Marx, a political ideology often known as Marxism-Leninism. It marked the beginning of the spread of communism in the 20th century.
Sadly, the historians knew nothing about Russia but they knew they could bullshit.
The economists were busy trying [and failing] to rewrite the Settled Economics.
To buy time the economics lecturers focussed upon the mathematics of monetarism whilst studiously trying to avoid the problems of Keynesian, debt, fiat money, big government, the death throes of the free market and reality.
In monetary economics, monetarism is a school of thought that emphasizes the role of governments in controlling the amount of money in circulation.
Monetarism is an economic theory that focuses on the macroeconomic effects of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.
The rise of the popularity of monetarism also picked up in political circles when Keynesian economics seemed unable to explain or cure the seemingly contradictory problems of rising unemployment and inflation in response to the collapse of the Bretton Woods system in 1972 and the oil shocks of 1973. On the one hand, higher unemployment seemed to call for Keynesian reflation, but on the other hand rising inflation seemed to call for Keynesian disinflation.
Sadly, the economists knew nothing about monetarism but they knew they could bullshit.
Clearly, the historians and economists were avoiding [at all costs] joining up the dots between Politics and Economics.
Sad but true.
Learning anything about Political Economy had to wait [for three years] until I enrolled in the university of life and started working in the City of London.
The university of life soon taught me that politics, economics and journalism specialised in Bread and Circuses.
“Bread and circuses” (or bread and games) (from Latin: panem et circenses) is metonymic for a superficial means of appeasement.
In the case of politics, the phrase is used to describe the generation of public approval, not through exemplary or excellent public service or public policy, but through diversion; distraction; or the mere satisfaction of the immediate, shallow requirements of a populace, as an offered “palliative.”
Therefore, it’s a shock whenever an outbreak of honesty appears in the mainstream media.
US official apologises to EU counterparts for undiplomatic language
Victoria Nuland reportedly said ‘Fuck the EU’ speaking of Ukraine crisis, though department didn’t confirm it was her voice on tape.
Ed Pilkington – Thursday 6 February 2014 – The Guardian
My state of shock was re-established this week when the mainstream media reported upon another outbreak of honesty.
Yanis Varoufakis: ‘I’m the finance minister of a bankrupt country‘
Ahead of crunch talks with his German counterpart, Greece’s new ‘rock-star’ minister says he has already opened talks about a debt deal with the IMF
Mehreen Khan – 4 February 2015 – The Telegraph
What is even more shocking is the realisation that a professor of economics has finally joined up the dots between Politics and Economics.
This is what the crisis is doing to our Europe: A clueless political personnel, in denial of the systemic nature of the crisis, is pursuing policies akin to carpet-bombing the economy of proud European nations in order to save them.
Greece, Portugal, Ireland, Spain are beaten into a pulp to keep Italy and France in awe.
When I hear European officials, who habitually present these policies in the name of community, solidarity, efficiency, responsibility, worry about the loss of legitimacy of European institutions, I ask: Really?
In Europe we like to think of the European Economic Community, as an idea, an institutional blueprint, that was conjured up as a bulwark against totalitarianism.
The first academic conference, with the full participation of government ministers and officials, to discuss, and I quote from the official program, “The formation of a European Economic Community”, took place in Berlin.
Under the auspices of Walther Funk, Hitler’s finance minister and president of the Reichbank.
A year later, another official, had this to say: “In my view a nation’s conception of its own freedom must be harmonised with present-day facts and simple questions of efficiency and purpose… Our only requirement of European states is that they be sincere and enthusiastic members of Europe.” “In fifty years Europeans will not be thinking in terms of separate countries.”
The official’s name?
Moving from my European Union tales to a brief history of the European Union, let me begin by exploding two self-satisfying myths that Europeans hold dear.
First, that the European Union is founded on principles of free-market liberalism.
And, secondly, that it was a European design implemented by brave Europeanists.
It was neither.
The European Union began life as an American design conceived by the New Dealers and implemented in the context of the Cold War in order to stabilise Western Capitalism as part of America’s Global Plan, a Plan that included the Bretton Woods System of Fixed Exchange Rates.
From 1944 onwards, the New Dealers’ great fear was that the American economy would slip into another depression after 1949, as factories would lay off workers once the war economy was wound down.
With the dollar the only convertible currency, the new crisis would spread like a bushfire through the rest of the capitalist world at a time of rising Soviet influence and power.
Being the sole surplus nation globally, they understood that the only way of avoiding this calamity would be to recycle America’s surpluses to Europe and to Japan in order to create the demand that would keep their own factories producing all the gleaming new products, washing machines, cars, television sets that American industry would switch to.
Thus, the project of dollarising Europe began.
A most impressive hegemonic program that I only wish today’s Europe understood.
A program that demonstrates vividly the sharp difference between hegemony and authoritarianism.
And reminds us of how badly today’s Europe needs an hegemonic Germany.
Very early on, in 1946, the New Dealers also grasped that their Global Plan could not rest on the single pillar of the US economy and the dollar.
It required secondary pillars to underpin it.
They selected the yen and the DM for that role and set out to reinforce the industrial foundations on which these currencies sat.
So Germany and Japan, the recently defeated nations, were to become the regional powerhouses east and west of the American Goliath.
However, powerhouses need vital spaces; large markets around them capable of producing the demand for all the goodies that come off the production lines and which the German and the Japanese markets could simply never absorb.
So, the New Dealers had a pressing question to answer:
Where would demand come from for German and Japanese manufactures?
In the case of Germany, the answer was: the rest of Europe.
In the case of Japan the original idea was to turn China into Japan’s vital space.
This dazzling plan had two major hitches: Mao Ze Dong wrecked its basic ‘eastern’ tenet as his triumph meant that China would never become a hinterland for Japanese industry.
The United States responded to this problem by turning its own backyard into Japan’s vital space.
Meanwhile in Europe, the plan clashed with the French demand that German industry be dismantled.
Indeed, seven hundred German factories were destroyed by the allies as per an earlier agreement within Allied Command that 1700 German industrial plants be destroyed.
Another thousand were about to be wrecked.
That had to change, if the New Dealer’s plan were to have a chance.
To bring the French elites around to their idea of a German Powerhouse at the heart of a United Europe, the New Dealers offered Paris a simple deal: “Accept the notion of a re-industrialised Germany dominating a Northern and Central European heavy industry cross-border cartel. In return we guarantee to the graduates of your Grand Ecoles that they will be administering the new cartel’s institutions, and to your French bankers access to German surpluses with which to make Paris a major financial centre.”
The French had been made an offer they could not refuse.
With one exception: General Charles De Gaulle who opposed it tooth and nail, unable to accept that France would be embedded in an Anglo-Saxon Global Plan in which Germany would be the European powerhouse; a position that pushed him into the political wilderness from 1946 till the eruption of the Algerian War which he, uniquely, had a capacity to end.
Recapping, out of necessity and in a remarkable display of pragmatism, Washington embraced the idea that European Unity would be built upon a cartel of heavy industry, rather than on their cherished principle of competitive markets.
While of a democratic disposition themselves, the New Dealers went to bed with traditionalist Frenchmen like Jean Monnet who felt only disdain for their New Deal, who harboured a Platonic contempt for liberal democracy, and whose vision of a United Europe was beholden to the idea of some central European cartel administered by ‘technocrats’.
The process, once it began, was inexorable.
First a German dominated cartel of coal and steel emerged (the European Coal and Steel Community), with a cross-border French-dominated administration.
Once tariffs on coal and steel were removed, it was a natural next step to remove all tariffs (i.e. the establishment of the European Economic Community in 1957).
But to co-opt French farmers, a common agricultural policy was established (in 1962) the purpose of which was to secure the farmers’ consent to a free trade zone by handing over to them a chunk of the cartel’s monopoly profits.
This fledgling European Economic Community created large surpluses that fuelled post-war prosperity in a stable world environment where the fixed exchange rate regime known as Bretton Woods was constantly stabilized by the United States which took it upon themselves to recycle to Europe and to Asia almost 70% of their surpluses, while ruthlessly regulating all large cross-border financial flows.
A Golden Age of low unemployment, low inflation high growth followed throughout western capitalism.
It created the conditions in which the dream of Europe’s shared prosperity could materialise.
At the expense of treading on European sensibilities, it was an American triumph.
Alas, by the late 1960s it was dead in the water.
Because America lost its surpluses and could no longer stabilise the global system by recycling surpluses it no longer had.
Never too slow to accept reality, the United States announced the end of that era.
The calendar read: 15th August 1971.
The dollar was de-coupled from gold, from the yen and from Europe’s currencies.
John Connally, Richard Nixon’s Treasury Secretary, visited Europe to tell our gob smacked leaders: “The dollar is our currency but it is your problem”.
Europe had become unhinged!
Europe’s ‘unhinging’, circa 1971, was the reason that Giscard d’ Estaing and Helmut Schmidt ended up seeking solace at Charlemagne’s resting place, after their decision to embark upon monetary union in 1978.
Germany was buffeted by a DM rising against the dollar while Italy and other countries crucial for northern European exporters were pegging their currency to the devaluing dollar.
The post-war American design of a Europe rotating around the axis of a North-Central European heavy industry cartel was in peril.
A fixed exchange rate regime was imperative to keep it going.
Thus Europe set off on the road to creating its own Bretton Woods within the EU.
The European Monetary System was thus born.
It marked the first time that France and Germany were improvising, designing the next step of European integration without the active help of the Americans who, I submit to you, knew better.
What did they know better?
They knew that is impossible to stabilise a fixed exchange rate or common currency system without large-scale surplus recycling.
They understood that, unless there is federation and large scale recycling, it is impossible to combine (A) free trade, (B) free capital movement, and (C) monetary union.
That you can choose up to two of these features, any two, but never all three.
For instance, you can have free trade and free capital movements as long as exchange rates vary (e.g. NAFTA).
Or you can have free trade and fixed exchange rates with capital movements restricted (e.g. contemporary China vis-à-vis the Rest of the World).
Or you can have fixed exchange rates and free capital movement without free trade (a combination that never implemented).
American policy makers understood that, if you set up such a fixed exchange rate regime with free trade and free capital movements, but without a surplus recycling mechanism, you will end up with something like the 1920s Gold Standard.
Fixing exchange rates between disparate economic regions always brings benefits in the short term; even if it is unsustainable in the long run (i.e. in the absence of surplus recycling).
But these benefits resemble past invasions of Russia: a brisk beginning full of enthusiasm and hope, rapid progress that seems unstoppable, followed by a heart-wrenching slowdown as a Cruel Winter takes its toll, ending up with blood on the snow and infinite retributions thereafter.
Did Giscard and Schmidt not know this?
Did Mitterrand and Kohl wallow in ignorance?
Were Europeans merely unschooled to this very simple economic principle?
I have it on good authority that at least President Francois Mitterrand understood perfectly well all of the above.
And I am happy to assume that the others did too.
My explanation is that, while they did they understand how crucial large scale surplus recycling was to any monetary union, in their minds they presumed that surplus recycling can only be properly instituted in the context of a federal system.
But they also knew well that the very DNA of the EU was inimical to the idea of Federation.
Despite the flimsy foundations, the Eurozone was, all things considered, doing reasonable well.
Until 2008 that is.
The answer, yet again, is: Because of the United States of America!
You see, as the American authorities were dismantling the Bretton Woods system in 1971, they were adopting an audacious strategic move: instead of tackling the nation’s burgeoning twin deficits, America’s top policy makers decided to do the opposite: to boost deficits.
And who would pay for them?
The rest of the world!
By means of a permanent transfer of capital that rushed ceaselessly across the two great oceans to finance America’s deficits.
The deficits of the US economy, thus, operated for decades like a giant vacuum cleaner, absorbing other people’s surplus goods and surplus capital.
In turn, powered by America’s deficits, the world’s leading surplus economies, Germany, Japan and, later, China, kept churning out the goods that America absorbed.
Almost 70% of European profits were being transferred back to the United States, in the form of capital flows to Wall Street.
And what did Wall Street do with it?
It financed the rise of financialisation; a process which the French and German banks joined in enthusiastically.
This was the reason why Europe, despite having introduced an unsustainable Gold Standard in its midst, seemed to be prospering.
Through its expanding deficits, the United States was generating aggregate demand for European exports capable of stabilising an inherently unstable Eurozone.
Meanwhile, the flow of European, Japanese and Chinese profits into Wall Street were generating the production of toxic money that buoyed the French and German banks and allowed them to go on a lending spree in the European Periphery; a spree that ended up adding significantly to the German economy’s success at amassing large surpluses that allowed its corporations (including middle sized firms) to globalize and thus to spread their wings aggressively into Eastern Europe, the Americas and, of course, China.
Throughout the Eurozone, a conviction spread that a new Golden Era was in train.
Until 2008 when, following Wall Street’s collapse, America could no longer provide the European Union with the aggregate demand for its exports that had, until then, stabilised it.
Even worse, the Crash of 2008 produced a gargantuan credit crunch that saw liquidity disappear and, soon after, guaranteed the deep insolvency of French and German banks.
The rest is history.
Governments dutifully transferred from taxpayers to bankers whatever mountains of credit and capital were necessary to keep up the pretense that the banks were safe.
Nonetheless, these moves, while successful in keeping the ATMs going, could never disguise the brutal fact that the Eurozone’s architecture was simply incapable of sustaining the shockwaves of the 2008 global earthquake.
Since then our monetary union has been unraveling and the European Union’s denial of this systemic crisis threatens to bring the EU down.
EU officials regularly defend their position in a manner that is simultaneously Jesuit, Orthodox, Catholic and Calvinist: Jesuit in the sense that bureaucrats, like Mr Olli Rehn, habitually prove every proposition and its contrary depending on how events pan out.
Orthodox in that economic analyses are accepted only to the extent that they suit the purposes of Prophecy.
Catholic because of a presumption that debt must condemn whole nations to some institutional Purgatory in which collective suffering will deliver them from the sin of debt.
And Calvinist in the sense of excluding more and more Europeans from the Circle of the Select, until those left inside it would achieve salvation through Faith in the impossible idea of recovering via universal austerity.
The American institutionalist Clarence Ayers once wrote, as if he were referring to our EU officials, that: “They pay reality the compliment of imputing belief to ceremonial status, but they do so for the purpose of validating status, not for the purpose of achieving efficiency.”
It is tempting to say: To Hell with it.
This EU is not worth defending.
It was built on foundations that secured an unsustainable institution whose struggle for survival caused a dirty war against Europe’s soul and against its very people.
Be that as it may, this is a temptation that we must resist.
However deserved an antipathy to the existing EU, and to the Eurozone, may be, its dismantling will immerse Europe into a new, postmodern 1930s.
The argument that, in the long run, Europeans will emerge stronger and freer is not one that I am prepared to countenance.
At least not more so than the free-marketeers’ claim that in the long run markets achieve equilibrium.
For as John Maynard Keynes would retort, in the long run we shall all be dead.
Or, perhaps more in tune with the present EU, in the long run whole generations of Europeans will have been condemned to a life that is nasty, brutish and dominated by the Serpent’s offspring.
It is in the context of this assessment that I conclude that those of us who detest the present EU modus vivendi and who find the Eurozone’s architecture ludicrous have a moral duty to work tirelessly toward pushing Europe hard and steadfastly toward reforming itself.
Even if we feel that we shall fail.
Observing the European Union’s attempts to deal with the crisis is a bit like watching Othello – one wonders how our rulers can be so deluded.
The principle of the greatest austerity for the European economies suffering the greatest recessions would be quaint if it were not the ill wind that blows into the sails of misanthropy, racism, Nazism.
In an ironic historical twist, Nazism is now strong in a place that had fought it tooth and nail in the 1940s, in Greece, and almost absent in Germany.
The good news is that the Germans no longer fear the Germans.
Europe needs an hegemonic Germany.
A confident Germany that understands that the current Gross Denial of the crisis’ nature is costing Germans dearly.
That their taxes are being used to build new cleptocracies in the Periphery while the proportion of working poor Germans is skyrocketing.
And when the whole ‘thing’ unravels, there will be nothing but losers all over Europe and beyond.
It is in this sense that Europeans do have, still have, a powerful, common interest.
To confront the bureaucracies, the cartels, the cleptocrats who are preventing them from adapting the European Union to the post-2008 realities.
The Dirty War for Europe’s Integrity and Soul – 25 October 2013
Yanis Varoufakis – Thoughts for the post-2008 world
The complete outbreak of honesty by Yanis Varoufakis is a remarkable read for anyone interested in Political Economy since the Second World War.
Another remarkable outbreak of honesty came from David Stockman who concluded “the entire 20th Century was a giant mistake” caused by “a megalomaniacal madman”.
My humble thesis tonight is that the entire 20th Century was a giant mistake.
And that you can put the blame for this monumental error squarely on Thomas Woodrow Wilson – a megalomaniacal madman who was the very worst President in American history……..well, except for the last two.
His unforgiveable error was to put the United States into the Great War for utterly no good reason of national interest.
The European war posed not an iota of threat to the safety and security of the citizens of Lincoln NE, or Worcester MA or Sacramento CA.
In that respect, Wilson’s putative defense of “freedom of the seas” and the rights of neutrals was an empty shibboleth; his call to make the world safe for democracy, a preposterous pipe dream.
Actually, his thinly veiled reason for plunging the US into the cauldron of the Great War was to obtain a seat at the peace conference table – so that he could remake the world in response to god’s calling.
But this was a world about which he was blatantly ignorant; a task for which he was temperamentally unsuited; and an utter chimera based on 14 points that were so abstractly devoid of substance as to constitute mental play dough.
Or, as his alter-ego and sycophant, Colonel House, put it: Intervention positioned Wilson to play “The noblest part that has ever come to the son of man”.
America thus plunged into Europe’s carnage, and forevermore shed its century-long Republican tradition of anti-militarism and non-intervention in the quarrels of the Old World.
Needless to say, there was absolutely nothing noble that came of Wilson’s intervention.
It led to a peace of vengeful victors, triumphant nationalists and avaricious imperialists – when the war would have otherwise ended in a bedraggled peace of mutually exhausted bankrupts and discredited war parties on both sides.
By so altering the course of history, Wilson’s war bankrupted Europe and midwifed 20th century totalitarianism in Russia and Germany.
These developments, in turn, eventually led to the Great Depression, the Welfare State and Keynesian economics, World War II, the holocaust, the Cold War, the permanent Warfare State and its military-industrial complex.
They also spawned Nixon’s 1971 destruction of sound money, Reagan’s failure to tame Big Government and Greenspan’s destructive cult of monetary central planning.
The Epochal Consequences Of Woodrow Wilson’s War – Remarks by David Stockman
Committee for the Republic – Washington DC January 20, 2015
Wilson induced a conservative Democratic Congress to pass a progressive legislative agenda, unparalleled until the New Deal in 1933.
This included the Federal Reserve Act, Federal Trade Commission Act, the Clayton Antitrust Act, the Federal Farm Loan Act and an income tax. Child labor was temporarily curtailed by the Keating–Owen Act of 1916.
Wilson also averted a railroad strike and an ensuing economic crisis through passage of the Adamson Act, imposing an 8-hour workday for railroads.
At the outbreak of World War I in 1914, Wilson maintained a policy of neutrality.
Narrowly re-elected in 1916 around the slogan “He kept us out of war”, Wilson’s second term was dominated by American entry into World War I.
That year he proclaimed June 14 as Flag Day in a patriotic speech that bore out the nation’s anti-German sentiment.
In April 1917, when Germany persisted with submarine warfare, Wilson asked Congress to declare war in order to make “the world safe for democracy.”
Students of Political Economy may also be interested in an outbreak of honesty penned by Henry George in 1884 which is frequently overlooked [or underplayed] by many mainstream historians and economists.
Henry George (September 2, 1839 – October 29, 1897) was an American writer, politician and political economist, who was the most influential proponent of the land value tax and the value capture of land/natural resource rents, an idea known at the time as ‘Single-Tax’.
His immensely popular writing is credited with sparking several reform movements of the Progressive Era and ultimately inspiring the broad economic philosophy often referred to today as Georgism, the main tenet of which is that people legitimately own value they fairly create, but that natural resources and common opportunities, most importantly the value of land, belongs equally to each person in a community.
His most famous work, Progress and Poverty (1879), sold millions of copies worldwide, probably more than any other American book before that time.
It is a treatise on inequality, the cyclic nature of industrialized economies, and the use of the land value tax as a remedy.
Preface to the Fourth Edition
In 1871, I first published these ideas in a pamphlet entitled Our Land and Land Policy.
Over time, I became even more convinced of their truth.
Seeing that many misconceptions blocked their recognition, a fuller explanation seemed necessary.
Still, it was impossible to answer all the questions as fully as they deserve.
I have tried to establish general principles, trusting readers to extend their application.
While this book may be best appreciated by those familiar with economics, no previous study is needed to understand its argument or to judge its conclusions.
I have relied upon facts of common knowledge and common observation, which readers can verify for themselves.
They can also decide whether the reasoning is valid.
I set out to discover why wages tend to a bare minimum despite increasing productive power.
The current theory of wages, I found, is based on a misconception [namely, that wages are paid from capital].
In truth, wages are produced by the labor for which they are paid.
Therefore, other things being equal, wages should increase with the number of laborers.
This immediately confronts the influential Malthusian doctrine that population tends to increase faster than subsistence.
Examination shows that this theory has no real support.
When brought to a decisive test, it is utterly disproved.
Since these theories cannot explain the connection between progress and poverty, the solution must lie in the three laws governing the distribution of wealth.
These laws should correlate with each other, yet economists fail to show this.
An examination of terminology reveals the confusion of thought that permits this discrepancy.
To work out these laws, I first take up the law of rent.
Although economists correctly understand this law, they fail to appreciate its implications.
For whatever determines the part of production that goes to landowners must necessarily determine what is left over for labor and capital.
Progress and Poverty – Henry George
Edited and abridged for modern readers by Bob Drake – Robert Schalkenbach Foundation
Progress and Poverty – 1884 – Henry George