ZoneBitcoin EditorialOn August 15, 1971, U.S. President Richard Nixon made a decision that changed the course of world economic history: he ended the convertibility of the dollar into gold. This event, known as the "Nixon Shock," marked the end of the system of Bretton Woods, an international monetary system with fixed parities which had made the dollar the main global reserve currency.
After more than 52 years, criticism against this decision is still persistent and many bitcoiners believe that the best alternative remains the use of Bitcoin.
In this article, we examine the impact of this decision on the global economy and to what extent Bitcoin is considered a solution.
Context: End of the Second World War
In 1944, at the end of World War II, the Bretton Woods Agreement was signed, establishing an international monetary system based on gold. All currencies were defined in dollars and only the dollar was defined in gold, based on 35 US dollars per ounce. This meant that the United States had to control the "real" value of its currency by not letting its budget go out of control.
In the 1960s, however, U.S. balance of payments deficits began to emerge and widen, due in part to the Vietnam War and the Space Race with the Soviet Union.
These deficits contributed to a gradual loss of confidence in the dollar as a reference currency.
The boundaries of Bretton Woods
Although the Bretton Woods agreements contributed to exchange rate stabilization and post-war economic reconstruction, they also had inherent limitations.
One of these limitations lay in the dependence on the American dollar, which became the main foreign exchange reserve. This excessive concentration has exposed global economies to U.S. monetary and economic policy, leading to imbalances and inflationary pressures in other countries.
Additionally, the fixed parity system imposed by the Bretton Woods Agreement restricted the flexibility needed to adjust exchange rates according to changing economic realities, ultimately contributing to the disintegration of the system in the 1970s.
The Triffin Paradox
The Triffin Paradox, formulated by Belgian-American economist Robert Triffin in the 1960s, highlights a dilemma inherent in the international monetary system based on a reserve currency, such as the US dollar at the time.
In his book Gold and the Dollar Crisis: The Future of Convertibility published in 1960, Triffin pointed out that when the country issuing the reserve currency (in this case, the United States) seeks trade surpluses to build confidence in its currency, it can lead to a global liquidity shortage and hamper the global economic growth.
This economic paradox manifests itself when international liquidity needs exceed the ability of the issuing country to maintain an adequate supply while preserving the value of its own currency.
Le Triffin's paradox thus illustrates the inherent conflict between the national interests of the issuing country and global liquidity needs, highlighting the tensions and structural imbalances inherent in the international monetary system based on a single reserve currency.
The “Nixon Shock”: Redefining the International Monetary Order
In 1971, US President Richard Nixon made a bold decision that would have a profound impact on the global economy: he announced the suspension of the convertibility of the US dollar into gold. This ended the Bretton Woods system and triggered what is now commonly referred to as the "Nixon Shock."
This decision was mainly motivated by several economic and geopolitical factors:
- Pressure on gold reserves: The Bretton Woods system was based on the convertibility of the dollar into gold at a fixed rate. However, several countries, including France, had begun converting their excess dollars into gold, putting the United States' gold reserves at risk. This conversion into gold created imbalances in monetary reserves and undermined confidence in the stability of the dollar.
- US trade deficits: The United States was facing growing trade deficits, in part due to the high costs associated with the Vietnam War and related government spending. These trade deficits resulted in a net outflow of U.S. dollars to other countries, further weakening U.S. foreign exchange reserves.
- Galloping inflation: The expansionary monetary policy carried out by the American Federal Reserve (the Fed) to finance the Vietnam War and stimulate growth had contributed to an increase in inflation in the United States. This inflation was eroding the real value of the dollar and creating concerns about the stability of the currency. Since the crash of 1929, Americans have been very sensitive to inflationary pressures.
- Maintaining economic competitiveness: Valuing the dollar at a fixed level against gold limited the flexibility needed to adjust the exchange rate to maintain economic competitiveness. American companies found themselves at a disadvantage abroad due to an overvalued currency, which negatively impacted exports and employment.
In response to these numerous challenges, Nixon announced the suspension of the convertibility of the dollar into gold on August 15, 1971. This decision, although very controversial and criticized at the time and still today, allowed the United States to take control of their monetary policy independent of the constraints of the gold standard and paved the way for the era of floating exchange rates.
This historic decision marked a major turning point in the international monetary order and had lasting economic, financial and geopolitical repercussions, which we feel in our current economy.
Economic and geopolitical repercussions
The "Nixon Shock" had far-reaching consequences. On the one hand, countries were faced with increased exchange rate volatility, making international transactions more complex. On the other hand, the US dollar remained the main reserve currency despite the end of its convertibility into gold, which confirmed the dependence of the global financial system on the United States.
The end of dollar convertibility into gold led to a dizzying accumulation of dollars around the world. This allowed the United States to continue investing abroad and increasing its deficits without fear of currency devaluation. Indeed, countries around the world are then forced to use dollars for international trade.
However, this decision also had negative consequences. It weakened the dollar as a reserve currency and led to global monetary instability. Additionally, it allowed the United States to finance its multiple wars through inflation, which led to an increase in public debt.
Inflation, which followed the abandonment of the gold standard, had a significant impact on businesses. It increased the cost of living and prompted businesses to invest more to maintain their real value. Additionally, inflation made long-term investments riskier, leading to decreased investment and lower economic growth.
The Advent of Floating Exchange Rates
The "Nixon Shock" marked the beginning of the era of floating exchange rates, in which currencies were no longer tied to fixed values but could fluctuate according to market forces. This new reality transformed international financial markets and required governments and institutions to adapt to new economic dynamics.
The advent of fiat money
Fifty years after the end of the convertibility of the dollar into gold, the dollar remains the main global reserve currency. However, the role of the dollar as a reserve currency is increasingly contested.
The phrase "What the Fuck Happened in 1971" is often used to discuss the long-term consequences of these events and how they influenced modern economics, politics, technology, and society.
It is also a way of reflecting on the evolution of the world since that time and of questioning the structural changes that have taken place.
The end of dollar convertibility into gold led to the widespread adoption of fiat money, which is not backed by a physical asset like gold.
Criticism of the traditional monetary system and Bitcoin
Among the loudest voices condemning fiat currency are Bitcoin supporters. THE Most maximalist Bitcoiners criticize the fiat monetary system, that is to say currencies not backed by a physical asset like gold. The end of the dollar's convertibility into gold in 1971 marked the beginning of the era of fiat currencies, allowing governments to create money "out of thin air."
Authors like Saifedean Ammous consider that this freedom of monetary creation has led to economic imbalances, inflation and the depreciation of savings, which has contributed to the current financial problems. This is why he is in favor of using a new standard which would be Bitcoin.
Read the article : The summary of the book “The Bitcoin Standard” by Saifedean Ammous
Bitcoin as an Alternative last
After more than 50 years, the dollar's role as the world's reserve currency is increasingly contested. So, for many people, Bitcoin as a decentralized cryptocurrency is seen by Bitcoiners as an alternative to these problems. Bitcoin scarcity, with total supply limited to 21 million units, contrasts with the unlimited monetary creation of fiat currencies.
Bitcoiners see Bitcoin as a way to preserve long-term value and resist inflation.
This conviction is reinforced by the economic events of recent decades and the impact of expansive monetary policy. This with the COVID crisis having been even more intense, pushing more and more people to be interested in Bitcoin, as a legitimate alternative.
Due to the ever-increasing adoption of bitcoin around the world and particularly in the most disadvantaged countries by the FIAT system, we can estimate that it is an ever more legitimate alternative.
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