Matthew Lynn
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The global economy entered a new era of free-floating exchange rates, and what economists refer to as pure ‘fiat money’: that is, money that exists on nothing more than the promise of a central bank, and ultimately a government, to maintain its purchasing power. The Washington Post writer William Greider later described it ‘as the precise date on which America’s singular dominance of the world economy ended’. A new book on the subject, Three Days at Camp David: How a Secret Meeting in 1971 Transformed the Global Economy by Jeffrey Garten, of the Yale School of Management, argues that the world was never the same afterwards.
Professional historians might debate whether 50 years is enough time for any real perspective on the experiment. The rest of us will probably decide there is plenty of evidence, and not much of it is very encouraging. True, we no longer have the periodic exchange rate crises that used to cripple governments, especially of economies in relative decline (the UK was especially prone to them). But otherwise it has been a very bumpy ride. The oil price explosion triggered the inflationary spiral of the 1970s, followed by the battle to stabilise prices with crushing interest rates and skyrocketing unemployment during the 1980s. That was followed by the rampant dotcom bubble, a crash, followed by another bubble, and then the financial collapse of a decade ago, as banks and financial institutions went bust on an unprecedented scale.
But by far the most extraordinary trend has been the rise of debt. According to the Institute of International Finance, by the close of last year, global debt hit $281 trillion, the highest on record, equal to 335 per cent of global GDP. It has been going up every year, spurred on by central banks printing cash. When there was a link between money and gold, that was impossible. You would need a lot more of the metal than exists on this planet to finance all that borrowing and probably a few others as well. With fiat money, there is no limit to how much you can magic out of thin air.
Of course, the gold standard was far from perfect, and neither was the dollar-linked version created after the second world war. Even by the early 1970s, the United States was no longer dominant enough in the global economy to carry the system by itself. That is even more true today (in 1970 the US still accounted for 40 per cent of global output, but it is less than half of that now). And yet the system of central bank money that has emerged since then is far from perfect either. It has created massive instability, endless boom and bust cycles, soaring inequality, and sent asset prices through the roof, as well as creating unprecedented levels of debt. It has taken governments a while to realise it means they can print money without limit; now the penny has dropped there is no way of knowing when they will stop.
Slowly, we may be edging towards a different monetary system. That is certainly part of the story behind bitcoin: people are looking for a form of money that is independent of the state, in the way that gold used to be. One point is certain. A half-century on from that fateful day, we are still shaken by the Nixon shock and figuring out how to cope with its aftermath.
Spectator.co.uk/money For more economic and financial news.
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