| What is the book is about? |
| Nixon and his top advisers went into a meeting to make a momentous decision to sever the link between the dollar and gold. At that moment—actually, since 1944—$35 could buy one ounce of gold. That link created a level of stability around the world that fueled the recovery of Japan and Germany from World War II and that created enormous prosperity in the US for over two decades. |
| There are several reasons why the US had to sever that link. One was that the currencies of Japan and Germany were much too cheap, which meant the dollar was overvalued. |
| Second, with an overvalued dollar, a trade deficit suddenly began to appear—the first in the 20th century. So there was enormous concern about American competitiveness and a major outburst of protectionism in Congress. To deal with these two problems, the US had to delink from gold. |
| But there was a third issue that was even bigger: the world economy had grown so fast and had become so big—and the need for dollars was so great—that the US printed many more dollars than it could back by gold. By 1971, the pledge that an ounce of gold was worth $35 became void. |
| So for all these reasons, they decided to cut the link to gold. And they did it in secret. They announced it at the end of the weekend. And it created enormous turbulence in the global economy and enormous strain among political allies.
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| How does this help us understand the global economy right now? |
| When the dollar was delinked from gold, the world changed in the way it saw money. Before that, money was a stable concept. If you held any currency, you could change it into dollars. And if you held dollars, you could change it into gold. |
| But once the link between the dollar and gold disappeared, the value of currencies became an assessment of the credibility of a country’s policies and the integrity of its financial institutions, such as its central banks and treasuries. |
| So we unleashed an era of floating exchange rates, which had two major effects. First, it created a world economy that was much more unstable; the values of currencies went up and down in substantial amounts. This resulted in a kind of financial casino because there was a chance to make money by speculating on currencies. That led to a whole industry of financial engineering. So all of the things we see today—derivatives, derivatives of derivatives, the fear of global banking crises—all of that really comes from the disconnect between currencies and something that is very tangible. |
| On the other hand, we made globalization much more possible because we reduced the odds of protectionism, since currencies took the hit rather than economies. We allowed for a much larger and faster flow of capital and a much greater volume of trade. I would argue that, on balance, this really helped the world. |
| What surprised you most about writing this book? |
| What surprised me the most were all the parallels that exist between August 1971 and August 2021. At that time, there was a growing trade deficit and a real fear about how the US was going to compete in the world. |
| There was a fear that Japan in particular had an economic system that was very different from ours, which was going to cause enormous problems. There was a feeling that the US had to focus more on building its society at home and that the Vietnam War had gone on too long and really had become not only a tragedy but an enormous distraction. And in 1971, there was also the beginning of an inflationary period, and that made people nervous about holding the dollar. |
| But substitute China for Japan, look at the inflation, and look at some of the possibilities for cryptocurrencies, particularly central-bank digital currencies, and you have to ask the question: Is the dollar going to come under enormous pressure again? I didn’t start out thinking there were parallels between these two periods. But when I was done, I said, “I think that a lot of things have either come full circle—or maybe they never changed.” |
| — Edited by Barbara Tierney |
