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  • Wanted: An Economic System That Works
  • Awake!—1971
  • Subheadings
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  • The Old Economic System
  • Why Did It Happen
  • Trying to Stem the Tide
  • Reaction Abroad
  • Will It Work?
  • The Dollar in Trouble Overseas
    Awake!—1971
  • Why the U.S. Dollar Is Buying Less
    Awake!—1973
  • What Is Behind the Dollar’s Problems?
    Awake!—1971
  • Why the Worldwide Inflation?
    Awake!—1973
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Awake!—1971
g71 10/22 pp. 21-24

Wanted: An Economic System That Works

THE Western world’s economy has not been the same since last summer. In fact, it will never be the same again.

When the system it had been using was given its death stroke by United States President Richard Nixon on August 15, a long period of uncertainty set in.

The President’s action created an economic nightmare for the noncommunist world. Since then those nations have been in search of a new economic system, one that will work.

But why was the old one cast aside? What hope is there that a new one will work any better than the old one which failed?

The Old Economic System

The previous economic system was established at a conference of Western nations meeting at Bretton Woods, New Hampshire, in 1944. They formed what was called the International Monetary Fund, an arrangement eventually joined by well over one hundred noncommunist nations.

What was the foundation of that system? It was based on the United States dollar. At that time the U.S. was the most powerful country in the world and its currency the strongest. So the nations agreed to set values for their money in relation to the dollar.

They agreed that they would not allow their currency to vary more than 1 percent up or down from the established values. This stability would make world trade much easier, since governments and businessmen would know at all times what their money was worth in terms of another country’s money. This made it relatively easy to determine the prices that should be charged for a country’s products, since no great fluctuation in money rates needed to be considered.

It was also agreed that the United States dollar would form the basic reserve currency of the Fund. And if a nation accumulated too many dollars because of running a surplus in its trade with the United States, it could turn those paper dollars in and get gold at $35 an ounce. Thus, the economic system begun in 1944 had as its basis the American dollar, which in turn was guaranteed by its vast gold reserve.

Why Did It Happen

Why was this system cast aside? Why did the United States take action, on its own, that threw the entire noncommunist world’s finances into turmoil?

A basic reason was noted by an American industrialist who declared that the leaders of the United States were “spending the taxpayers’ money around the world like drunken sailors.”

While that may be an oversimplification of a complex matter, it does portray a basic truth. Since World War II, the United States has indeed spent gigantic sums of money in other countries, principally on its military expenditures, foreign-aid programs and business investments. While it had a surplus in its commercial transactions, that is, it exported more goods than it imported, this surplus was not enough to offset the huge spending in the other areas.

Hence, throughout the period after World War II, and especially in recent years, the United States generally spent more money than it was making in foreign countries. That resulted in repeated deficits in what is called its ‘balance of payments.’ So year after year, it was losing money overseas. How long can an individual or a company keep doing that before it gets into trouble? If it continues, the end is bankruptcy. There has to be a day of reckoning sooner or later.

That day came in 1971. By then, the deficits in America’s balance of payments had grown so great that more than five times as many dollars were in the hands of foreigners as there was gold in the United States’ reserve.

To make matters much worse, for the first time in the century, indeed, since 1893, the nation’s import-export balance turned sour. It began to spend more on imports than it made on exports.

The years of military spending, foreign aid and other foreign spending, plus now a disastrous trade balance, were taking the United States toward bankruptcy in its financial dealings with other countries. It simply was not making enough money to pay its huge bills in other lands.

In mid-1971 Treasury Secretary John Connally acknowledged that America’s financial situation was deteriorating swiftly. It was also disclosed that the deficit in its balance of payments for the first half of 1971 was gigantic​—nearly three times as bad as it ever had been.

In addition, there was a huge deficit of about 23 billion dollars in the internal budget for the year, with a projected deficit even larger for the coming year. And wages and prices were soaring; inflation was nearly out of control. This, in turn, was helping to price American products out of world markets, making its trade picture much worse.

By the end of July, the deterioration had picked up so much speed that something had to be done. As Newsweek of August 30, 1971, reported:

“At a White House chat with legislative leaders early last week, Mr. Nixon offered a chilling account of the hazards of inaction: if he had waited just two weeks longer, he said, the dollar would have faced ‘catastrophe.’ One who was there thought the domestic situation was just as grim​—and equally important in the President’s calculations. ‘The signs indicated a devastating unemployment picture by December,’ he said, ‘perhaps more than 9 per cent.’”

What had become painfully obvious was that the economic policies of the United States had failed. Drastic measures had to be taken immediately to avoid “catastrophe,” measures the president himself had previously said he would not take. And an economic catastrophe for the United States would have plunged the entire noncommunist world into a calamity as severe as or worse than the depression of the 1930’s.

Trying to Stem the Tide

Thus, on August 15, President Nixon addressed the nation on television and announced his plan for trying to halt the slide toward catastrophe.

Major aspects of the president’s program included a 90-day “freeze” of prices and wages; halting the outflow of gold by forbidding other nations to exchange dollars for gold; a cut in government spending; tax relief for citizens and business; and a 10-percent additional tax on many imports coming from foreign countries.

But by refusing to redeem its own dollars for gold, as it had agreed to do in 1944, the United States killed the Bretton Woods agreement. It felt it had little choice. Why? Because, while the United States had over 24 billion dollars’ worth of gold in 1948, it had only a little over 10 billion left in mid-1971. Yet, foreigners held about 55 billion paper dollars in claims against that gold!

While the other nations had generally been polite enough to agree not to cash their dollars in for gold, they could not long continue to do this without endangering their own economies. Yet, a ‘run’ on the gold would have bankrupted the United States and in turn jeopardized all the nations of the Fund. So the gold window was shut until further notice.

By cutting the dollar from gold, the U.S. set the dollar “adrift” in world financial markets. It would now have to find its own level according to the law of supply and demand. And because the dollar was not doing well, the demand for it was poor compared to other currencies, especially the German mark and the Japanese yen. So the dollar’s value declined in relation to other currencies. This amounts to a devaluing of the dollar.

That simply meant that the dollar was no longer worth as much as it was before in other countries. Thus, for example, if you had paid $100 for a German product, it would now cost you more like $105, or more. Indeed, nearly all foreign products coming into the United States would become more expensive.

This extra cost, it was hoped, would encourage Americans to buy fewer foreign products, cutting imports and helping to correct the deficit in the trade balance. Also, since foreign currencies would buy more dollars than before, it would make American products cheaper for other countries, encouraging them to buy more and correcting the trade balance further.

Restoring its trade surplus was considered vital. Why? U.S. News & World Report notes: “In the Nixon view, a surplus in the U.S. balance of trade in goods must be restored in order to finance the country’s foreign outlays on military and economic assistance and on American investments abroad.”

To encourage the other nations to revalue their currencies upward, the president also imposed the 10-percent surcharge. That tax makes foreign products more expensive, discouraging Americans from buying them. It was said that when the other currencies have been revalued upward to America’s satisfaction, the surcharge would be dropped. The American goal is revaluation of the Japanese yen from 12 to 15 percent upward, the German mark about 8 percent, and smaller increases for other currencies.

Related to this was the “freezing” of wages and prices for 90 days, after which some other form of control was scheduled. This would help to halt inflation. Prices of American products would not keep going up as fast, making them more competitive in world trade. It would also help lower the rising fury of Americans who each year saw their money buy less and less.

Reaction Abroad

How have the other countries reacted to all this? Ralf Dahrendorf, West German member of a Common Market trade commission, said: “Few expressions have been used more widely to describe the effects of President Nixon’s new economic policy than that America’s partners are ‘shocked’ and ‘stunned.’ There are several reasons for this: the swiftness of the measures, the absence of consultation, the immediate effects of some decisions taken.”

What was particularly shocking was the 10-percent surcharge and the breaking of the 27-year-old promise to redeem dollars for gold. The prospect of decreased sales to the United States was a threat to the economy of other nations, even raising the specter of rising unemployment. As Dahrendorf said: “It is estimated that very nearly 90 per cent of the exports of the European communities to the United States, which amount to approximately $7 billion, will be affected. . . . There can be little doubt that we are going to see considerable dislocation of trade.”

Will the other nations meekly submit to this? It is not likely that they can for long. Newsweek commented: “The Russian Communist Party paper Pravda was not too far from the truth in saying that the U.S. had declared economic war on its allies.” And a banker said that the American president “has tossed a bombshell into others’ laps, and they might just decide to throw one back.”

Interesting reactions were also forthcoming from the common people abroad. At a European resort, British tourists delighted in asking Americans: “Well, how does it feel to be poor?” And in another country, when an American tourist offered to pay for a product in dollars, the clerk acidly said: “We don’t want that junk.”

Accurate, then, was a New York Times guest editorial that stated: “The disgrace of the dollar in world financial centers is sobering.”

Will It Work?

Will the American action work? Will it pull the United States out of its downhill slide? Can the dollar regain its former power and prestige? Will a new economic system that works rise out of the ashes of the old?

That some new kind of international economic system will emerge was a foregone conclusion. Whether it will work any better than the old one remains to be seen. The truth is that none of this world’s politicians or economists really know what will happen. As Treasury Secretary Connally conceded: “We have awakened forces that nobody is at all familiar with.”

A sobering appraisal came from a Toronto Globe and Mail editorial by Richard Needham, written just before the peak of the crisis last summer. Noting the decades-long decline of the British economy and currency, he said: “The world’s engaged in a flight from the dollar comparable to the flight from the pound that’s been going on through most of my lifetime. The reasons are much the same; the dollar no longer commands respect because the industrial effort behind it no longer commands respect.”

The similarity of the two countries is there: both have lived beyond their means for years and they have ceased to produce the best goods at the most competitive prices. Hence, Needham concluded: “Can the decline of the American dollar be reversed? More accurately, can the decline of the U.S. be reversed? I don’t think so, and here again we must look at the British pound. Once the process of decay sets into a nation, there seems no way of stopping it.”

Students of Bible prophecy do not need to depend, however, on the speculations of world leaders or economists to know what the future will bring for this world’s economies. They know what the future holds for these economies because God’s prophetic Word is clear: they are all scheduled to disappear soon, along with their governments. All these systems will be replaced by a government, and economy, under God’s direction.​—Dan. 2:44.

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