My Take | Part 1 of 2: The political economy of Chinese-US rivalry – how Nixon transformed the global economy

Columnists like yours truly love anniversaries. On slow news days, especially during the festive season, they always come in handy as column topics. But this year does mark two very significant landmarks: 20 years ago, China joined the World Trade Organization; 50 years ago, the United States ended the dollar-gold standard. One accelerated China’s economic rise; the other transformed the world economy and expanded the US dominance of the global monetary system, which ultimately underpins its military-political hegemony. Both events help explain a lot about the world we live in today and yet are perhaps not as widely understood as they should be. I will, however, skip the 100th anniversary of the birth of the Chinese Communist Party.

Americans always say Richard Nixon opened up China and paved the way for its rise. It’s more correct to say China was ready to open up to the US as both needed the other as a counterweight to Soviet Russia, and that domestic forces compelled China to adopt capitalistic reforms. But people rarely say Nixon transformed the global financial system, which he actually did, almost single-handedly in one fell swoop. That he got away with it and was mostly successful that people barely realised what he had done is all the more extraordinary. And its impact is at least as great, if not greater than US-China rapprochement.

He did so with what commentators sometimes call “the Nixon shock”. A new book, Three Days at Camp David: How a Secret Meeting in 1971 Transformed the Global Economy by Jeffrey Garten, gives an exciting account of how that decision came to be made.

In August 1971, with no prior warning, Nixon announced that the US would unilaterally end the US dollar-gold link, at US$35 an ounce. He did so for relatively simple reasons, at least from the American perspective. The US dollar was too overvalued because everyone wanted the global currency that was as good as, if not better than gold. But American exporters were losing out to foreign competitors and being killed off. In 1971, for the first time since the 19th century, the US recorded its first trade deficit, which has stayed and become structural ever since. The US was printing more money than its reserves in gold. That was OK so long as people had confidence in the dollar’s convertibility to gold. But what if they started losing confidence? In that case, you would have a sovereign version of a bank run.

For those reasons and others, Nixon wanted to devalue the dollar and then restore the peg at a more competitive rate. But despite various US and international attempts, no lasting fixed rate system re-emerged. Nixon effectively killed off the post-war Bretton Woods system of fixing global currencies to the US dollar-gold peg. The era of freely floating rates and fiat currencies started, though it would not be until 1976 when the International Monetary Fund formally put its seal of approval on the new system.

In history, the change of one global financial regime usually meant the replacement of one dominant player by another. The classical gold standard, from 1870 to 1914, was sustained by, and enabled the British Empire. The Bretton Woods system was backed by the “almighty dollar” and marked the rise of US global hegemony. In fact, by the early 1970s, from the US perspective, the dollar was getting too “mighty”, that is overvalued, for which the system was ultimately killed.