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Gerry Epstein: In ’71 Nixon closed the gold window and contributed to rise of the domination of finance and weakening of the real economy

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. Gerry Epstein, the codirector of the PERI institute in Amherst, Massachusetts, writes the following:


“The rise of American financiers and their counter-parts abroad saved the US dollar–but only by starving the US economy of good jobs and by almost destroying the global financial system.”


JAY: Now joining us to discuss all of this is Gerry Epstein. Thanks for joining us, Gerry.


JAY: So why do you say what you said?

EPSTEIN: Well, I was talking about an event that happened 40 years ago, August 15, 1971, which marked the formal end of the Bretton Woods system as we know it. Richard Nixon, then president, closed the gold window.

RICHARD NIXON (US EX-PRESIDENT): I have directed the secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.


EPSTEIN: Nixon abrogated a promise that the United States had made in 1944 at the Bretton Woods conference to tie the dollar to gold at $35 an ounce, and promised to pay anybody $35 if they promised–if they gave them $35, they’d give them an ounce of gold. And in 1971 Nixon said, we’re not going to do that. So you’ve accumulated all these dollars, and we’re not going to let you turn them in for gold. So it’d be like Obama telling the Chinese right now, well, you have all these dollars, but we’re only going to let you redeem them at about 75 percent of their value. So that was a sort of a default. And Nixon did that partly in order to get out of the straitjacket of the Bretton Woods system. In order to devalue the US dollar and to make US goods more competitive abroad, he decided to close the gold window. But, ironically, what that did was set into motion a whole set of events that ultimately led not to the revival of US manufacturing and the US real economy, but led to the rise of US finance, the financial sector, the bankers, that has ultimately led to the crisis of 2008 and really undermined the US economy.

JAY: Before we get more into that, why weren’t there more consequences to Nixon doing that? When you tell the world, we said we would honor this with gold and now we’re not, there didn’t seem to be a lot of repercussions, at least to the United States.

EPSTEIN: Well, I think there were two reasons. First of all, as now, there weren’t a lot of alternatives to the US dollar for other countries to hold their reserves. There really weren’t any alternatives. So the Germans and the other Europeans who had accumulated a lot of dollars just had to grin and bear it. US was at that time, even more than today, the major economic and military power, so there wasn’t much anybody could do about it. But second of all, the Germans and some of the others had gotten tired of the Bretton Woods system anyway, because the US had exported so many dollars it was leading to inflation in Germany, and the Germans, as you know, are phobic about inflation. And so they’d kind of had enough of the Bretton Woods system anyway.

JAY: A lot of the sort of libertarian economists, you know, Ron Paul supporters and others, they point to this moment as being a seminal moment that, getting off gold led to, you know, this fiat currency and the idea that you could have inflation because dollars can be created willy-nilly. What do you make of that argument?

EPSTEIN: Well, again, I think it’s wrongheaded. The problem really wasn’t that you got off of gold, per se. The problem was the political and economic forces that were unleashed as a result of this, and the fact that the United States really didn’t take advantage of this moment. The United States could have taken advantage of this moment to invest in the United States, to reindustrialize, to use industrial policy the way they were doing in Korea, and ultimately were doing in China, to really revive the US manufacturing base. But no, that’s not what the United States did. What the United States did instead was begin to liberalize financial markets. Reagan was elected, as Thatcher had been elected in Britain, and started pursuing neoliberal policies, more market-oriented policies, took down–and capital controls, and promoted the capital mobility around the world, fostered multinational corporation investment everywhere else in the world rather than more investment here in the United States. So rather than seizing on this moment of liberation from gold and liberation from Bretton Woods to really revive the US economy, what they really did was liberated the bankers and liberated the multinational corporations to start crawling around the world.

JAY: Was getting off gold more a symptom–or a reflection, I should say–of the power of bankers already, the power of the finance sector, and this was sort of something they need to clear out of their way? Or, in other words, if Nixon hadn’t done this, would the finance sector not have risen anyway, in terms of its dominance in the economy?

EPSTEIN: It was probably a reflection of that. But it was actually more a reflection of the legitimate decline of US power in the world. You know, after the Second World War, the United States was the dominant power by far. Europe had been destroyed in the war. Japan had been destroyed. The Soviet Union had a different system. China was doing its own thing. And after the Second World War, Japan and Europe revived. And so the US power had declined. So–but instead of the United States–what it could and should have done was made a decision to really share power with those other economies in the world, developing countries and so forth, and really promote a more shared kind of economic and political power. Instead, the United States decided to go it alone and decided to do it in such a way that it enhanced the power of finance, rather than enhancing the power of workers here in the United States.

JAY: Because at the time that Nixon did this, a lot of people were talking about the decline of the American dollar, it would no longer be the dominant world currency. And far from it. As we see right now in this crisis, if anything, it’s come back. It’s even stronger than it might have been.

EPSTEIN: That’s right. And the reason that happened was because the liberation of finance and financial liberalization let the financial markets explode, and the financial markets are based on the dollar. And so rather than the dollar being saved by the revival of the US real economy, it was saved by the revival of global finance, which ultimately led to the financial crisis of 2008 and has really, I think, led to the hollowing out of production in the US as well.

JAY: So what public policy do people demand, then? And it’s–I mean, you’re at a point now where you can’t even pass any serious regulations. You know, they’re trying to have some regulation in the finance sector. Maybe they’ll get a certain amount done. We’ll see. But the amount of lobbying power they have against it, this concentration of capital and ownership on Wall Street, leads to such political control in DC. But if you want to even just imagine something that would break that power, what would it be, other than to challenge with something publicly owned? Or what else?

EPSTEIN: Well, in the 1930s there was a division between industrial capital and finance capital. And after the Great Depression hit, I think the New Deal coalition was a coalition between certain segments of industrial capital and certain segments of labor. But now most industrial capital in the United States has sided with finance. They have big financial holdings themselves and are speculating.

JAY: This is like General Motors that has a big finance arm, or even Bloomingdale’s has their credit card.

EPSTEIN: That’s right, and they’re sitting on trillions of dollars of excess liquidity at the moment. What are they doing? They’re playing speculative games with it. So one can no longer, you know, depend on important segments of big business to break off from finance and push for a more rational system. So it really is going to depend on workers and the middle class to really force the political elites, to force the political system to really take their demands seriously–more public investment, higher wages, more empowering of labor. Unfortunately, you know, I think many thought that Obama was going to do that. He hasn’t done it. He’s sided with finance. And so it’s time for, I think, labor and progressive segments of the middle class to find some other kind of political vehicle.

JAY: I guess when your political campaign is financed by finance, you tend to stay within certain limits.

EPSTEIN: That’s right.

JAY: Thanks for joining us, Gerry.

EPSTEIN: Thank you.

JAY: Thank you for joining us on The Real News Network.

End of Transcript

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Gerald Epstein is co-director of the Political Economy Research Institute and Professor of Economics at UMass Amherst.