Five decades ago this month US President Richard Nixon informed the world that the United States would no longer honor its commitment to exchange US dollars for gold on demand. The compromise had been the foundation of the international monetary system created in 1944 at Bretton Woods, a conference established to regulate the international financial order after the conclusion of World War II. This system it required each participating state to maintain a fixed face value for its currency in terms of the US dollar. In return, the United States promised to freely exchange dollars for gold at the agreed price of $ 35 per ounce of gold.
Nixon’s action, announced on August 15, 1971, had profound and lasting effects on the International Monetary Fund , South Africa and Africa.
Nixon’s decision violated United States treaty obligations. But he had few options.
By 1970, the rest of the industrialized world had accumulated such a large holdings of dollars that the United States did not have enough gold to credibly keep the gold window open. The situation is likely to continue to deteriorate because in 1971 the US. first trade deficit 20th century.
In short, the United States lacked the resources to administer the Bretton Woods system on its own.
Five years after Nixon’s decision, IMF member states agreed to end the monetary role of gold and, in effect, move to a market system of floating exchange rates.
Nixon’s action 50 years ago continues to influence global economic governance. At the time, the ripple effects for southern Africa were also profound.
An unintended consequence was that South Africa, at the time the world’s largest gold producer, lost its position as a central player in the international monetary system. As a result, the apartheid regime in South Africa became less important to the Western world. This contributed to South Africa in collusion with the US to fight against Cubans and Russians who supported the Popular Movement for the Liberation of Angola (MPLA) in its fight for the independence of Angola.
It also made it easier for other nations to support sanctions against South Africa and, in the 1980s, to oppose future support from the IMF and later commercial banks to South Africa.
Nixon’s announcement and its aftermath also changed the IMF’s mission.
IMF change of course
During the Bretton Woods era, the IMF met annually with each of its member states to establish that they were following policies consistent with maintaining the nominal value of their currency. This put limits on the issues the IMF would raise during these visits, as well as the range of officials it needed to consult with.
It also meant that since all member states were participants in the same international monetary system, their ability to maintain the nominal value of their currency was influenced by the same variables. Furthermore, since they were all potential consumers of the IMF’s financial services, and during this time all member states turned to their finances, they would all need to pay similar attention to the IMF’s advice.
This was particularly relevant because the conditions that the IMF imposed on its financial support would likely be based on this advice.
The end of the nominal value system changed all this. If countries were not required to hold a particular value for their currency, what exactly was the IMF supposed to be monitoring in their annual mission to each country.
The treaty establishing the IMF had been modified. Now it was limited to stipulating that the IMF should ensure that member states contribute to a stable exchange rate system. This meant that the IMF had to monitor all factors that could influence the ability of each country to pay all its international obligations and keep the price of its exports competitive. Since almost any aspect of a state’s economy could affect the exchange rate, the IMF slowly began to broaden the range of issues they raised in their annual visits to countries. They began to incorporate topics such as food subsidies, labor policies, social spending, regulatory policies, trade policy, and the role of the state in the economy.
While the IMF surveillance reports were purely advisory, their impact varied depending on the situation in each country. Countries that were wealthy and knew they would not need IMF financial support could comfortably ignore its advice. After 1976, no rich country requested IMF financing until the European debt crisis in 2010. It thus regained the monetary sovereignty that it had ceded to the IMF at Bretton Woods.
On the other hand, countries that anticipated they would need IMF financing or IMF approval of their policies were forced to take the advice seriously. They knew that it would determine the conditions that the IMF imposed on financial support or their access to other sources of financing.
To a differentiated world
The result was that after 1976 the IMF became an organization that engaged with member states in a differentiated base.
Some, knowing that they would not need their services, could collaborate with the IMF essentially on a voluntary basis. Others, anticipating that one way or another they would need to consume the IMF’s services, were forced to treat the IMF with deference, knowing that they had limited ability to oppose its advice.
Unfortunately, given the weighted voting arrangements at the IMF, this differentiation also meant that the states with the dominant voice in the organization were not dependent on its services. As a result, they could impose demands on you without worrying about being accountable to those who would be most affected by their decisions.
This was a situation ripe for abuse. For example, in the Asian crisis of 1996, the most influential member states of the IMF might refuse to support IMF financing for Asian countries unless adopted economic policies that benefited rich countries.
The IMF also found a new role for itself in the 1980s as the disciplinarian of countries in Africa, Asia, and Latin America facing debt crisis. It offered these states some financial support in exchange for their other creditors offering them supplemental relief and their compliance with various IMF policy conditions. Given the broad scope of the IMF’s mandate, these conditions were intrusive in the affairs of its member states and were consistent with the ideological preferences of the free market of its wealthy member states.
This resulted, for example, in the controversial structural adjustment policies that the IMF forced the African states to follow in this period.
Long term impact
Nixon’s decision marked the end of America’s exclusive hegemony over the Western world. It also left the IMF without a clearly defined role. Under the leadership of the industrialized countries, it began to shape a new, more intrusive and ideological role as an advisor and financier to developing member states, including in Africa.
In addition, by freeing up exchange rates, Nixon initiated the process of globalization of finance and creating today’s global economyin which companies make decisions based on short-term financial considerations rather than on the real needs of people and society.