Читать книгу Financial Cold War - James A. Fok - Страница 25

Richard Milhous Nixon's most celebrated foreign policy achievement was the initiation of Sino-US rapprochement, the highlight of which was his February 1972 visit to China to meet with Chairman Mao Zedong (毛泽东). This diplomatic masterstroke fundamentally reshaped the Cold War balance of power in America's favour. It forced the Soviet leadership to the negotiating table on détente and paved the way for America's exit from a demoralising Vietnam War. For US allies in East Asia though, this sudden and unexpected development following Nixon's enunciation of the Guam Doctrine in 1969 was unsettling.⁵⁹ For none was it more so than Japan, whose government received only two hours' notice before Nixon's 15 July 1971 announcement that Henry Kissinger had made a clandestine visit to China to meet with Zhou Enlai (周恩来). This was one of a series of US diplomatic blows to Satō Eisaku's government that the Japanese media dubbed the Niksonu Shokku, or ‘Nixon Shocks’. However, it was not just in the realm of foreign policy that the 37^th president was to create long-lasting tremors. The financial shocks he delivered also left a profound legacy in global capital markets.

The better known of these financial shocks was the suspension of the dollar's convertibility to gold in 1971. This effectively brought an end to the Bretton Woods system.

Though the US had been running a current account surplus of around one percent of GDP throughout the 1950s, it was running an overall balance of payments deficit due to the flow of American capital into investments overseas. By the latter part of the decade, foreigners saw that the dollar was overvalued and began to exercise their rights to convert their dollar holdings into gold. Between the end of 1957 and the end of 1959, US gold reserves fell by around 15 percent. Fears of inflationary government spending under a Kennedy presidency led to a further nine percent decline in US gold reserves in 1960.⁶⁰ In short, more and more dollars were being backed up by falling reserves of gold.

When the London gold price jumped to almost $40 per ounce in October 1960, the Federal Reserve and the Bank of England were forced to intervene to bring the dollar back in line with the official exchange rate of $35. Thereafter, the US undertook a number of measures to stem the balance of payments deficit and discourage the outflow of dollars. These included the IET to discourage American purchases of foreign securities; the issue of Treasury bonds in foreign currencies⁶¹ to discourage Europeans from calling in gold; and coercion of European allies to help stabilise the value of the dollar.

This drew consternation from other countries, particularly after the escalation of US involvement in Vietnam. Among the most vocal critics was Charles de Gaulle, who complained that the dollar's supremacy allowed the Americans to indulge in costly foreign wars without having to curtail spending at home. In September 1963, he ordered the Banque de France ‘to demand from the Americans that eighty percent of what they owed us by virtue of the balance of payments should henceforth be repaid in gold’.⁶² France subsequently went so far as to send a battleship to collect its gold from the vaults of the New York Fed.

Germany, while more circumspect in its public statements, had revalued the Deutschmark in 1961 and 1969, but continued to see speculative inflows. In May 1971, the German government decided to allow its currency to float. Although this curbed speculative flows into Germany, it did little to stem capital outflows from the US. By that year, US dollar liabilities of $70 billion were backed by just $13 billion in gold.⁶³

In reality, de Gaulle was not entirely accurate when he suggested that the US did not bear a cost for its exorbitant privilege. Post-war recovery meant that European and Japanese exports had begun competing with US manufactures and this was already eroding America's share of global manufacturing, but there is little doubt that the overvalued dollar was accelerating this process. By the 1970s, this would be manifested in rising US unemployment.

As early as 1962, British Prime Minister Harold MacMillan suggested to JFK halving the rate at which the dollar could be converted into gold to $70 per ounce. However, even if Kennedy had acted on that suggestion, it would have merely deferred the problem of inadequate gold reserves and would have done nothing to address the issue of falling US export competitiveness. This is because, under Harry White's system, the values of all other currencies had been fixed against the dollar.

At the heart of the matter was a fundamental conflict that persists to this day: the US desire for balance of payments equilibrium is incompatible with the dollar's role as a global currency and the consequent need to supply dollar liquidity to the whole world. This conflict created by the Bretton Woods system was first identified in the 1950s by Belgian-American economist Robert Triffin and has come to be known as the ‘Triffin Dilemma’. It was not possible for the US to simultaneously issue enough dollars to satisfy the trading needs of the entire world and maintain a fixed exchange rate against gold. For one thing, as Keynes had pointed out in the 1930s, new supplies of gold were not keeping pace with the growth in the economy and in trade. And to keep the world supplied with sufficient dollar liquidity, the US must continue to run a balance of payments deficit. Failure to do so would starve the rest of the world of dollars and precipitate a liquidity crunch similar to the one in gold that had contributed to the Great Depression (see Chapter 3 for further discussion).

In the face of economic pressures and speculative attacks on the dollar, Nixon went on national television on 15 August 1971. In the grainy analogue broadcast, he announced in a calm tone that the US was suspending the dollar's convertibility to gold. In the height of irony, he told viewers that ‘The effect of this action … will be to stabilise the dollar’.⁶⁴ At the same time, he announced a 90-day wage price freeze to combat inflation and demonstrate to other countries that the US was taking its share of pain, as well as a temporary 10 percent import surcharge to protect US manufacturers from near-term currency fluctuations.

Nixon's announcement stunned the world. The President hadn't even forewarned the IMF. The US subsequently met with the other Group of 10 (G-10) countries at the Smithsonian Institute in Washington DC in December that year and, following two days of tough negotiations, announced that the dollar would, on average, be devalued by 10 percent, while the Deutschmark was revalued upwards by 13.6 percent and the yen by 16.9 percent. The dollar was pegged at $38 per ounce of gold and the permitted fluctuation from the new parities was widened to 2.25 percent. However, the Smithsonian Agreement did not hold. Nixon was not interested in being tethered to the new parities and, following his resounding election victory over George McGovern, attempts by the G-10 to re-establish a system of fixed parities were abandoned in 1973. The dollar would, henceforth, be a freely floating fiat currency without any fixed reference to gold or any other asset.

By ditching the shackles of gold, Nixon had established America's absolute monetary sovereignty. No longer would the US government be constrained in the amount of currency it could issue by its holdings of gold. And contrary to Harry White's concerns, the dollar maintained its role as the global reserve currency. By that time, the dollar was already too entrenched in the global monetary system and there was no obvious alternative to it. The freely floating dollar introduced volatility into the foreign exchange market that had not existed under the Bretton Woods system. It also allowed the dollar to depreciate based on America's relative economic performance versus its trading partners. However, as discussed in Chapter 3, steps taken by foreign central banks to maintain the stability of their currencies has limited the extent to which the dollar has actually been allowed to fall.

The second financial policy shock initiated under Nixon's administration was a domestic one. This was the move to abolish fixed brokerage commissions for trading shares on the NYSE.

For 183 years, pursuant to the Buttonwood Agreement of 17 May 1792 (so-called after the legendary buttonwood tree outside 68 Wall Street, under which the NYSE was established), brokers of the NYSE set a minimum level for the trading commissions they charged to their clients. By the 1960s, this clubby arrangement was the subject of increasing investor criticism. Moreover, an alternative over-the-counter (OTC) market was emerging as an avenue for investors to avoid paying fixed commissions. A heated debate between the Justice Department, the SEC, the NYSE and Wall Street brokers developed over the issue. However, in 1973, the SEC finally faced down diehard opposition from the brokerage community and initiated the process to put an end to fixed commissions. On 1 May 1975, which came to be known as ‘May Day’ within the industry, commissions for trading shares on the NYSE were finally deregulated.

At first, brokers clung to their previous commission levels. However, over time, competition dramatically reduced the cost of trading on the NYSE as discount brokers like Charles Schwab emerged, charging clients a fixed dollar amount per trade irrespective of the number or value of shares traded. The fall in trading costs contributed to huge growth in trading volumes in the following decades.

As the profitability of the old fixed commission structure disappeared, US brokers sought to scale up in order to extract cost efficiencies. Throughout the 1950s and 1960s, there had been four mergers between major US securities firms. Between 1975 and 1980, there were 29 such mergers and the pace accelerated throughout the 1980s and 1990s. Names like White, Weld & Co. were swallowed up by Merrill Lynch, while Kidder Peabody was merged into Paine Webber, which itself was acquired by the Swiss bank UBS in 2000.

These enlarged US firms were also incentivised to seek out new markets overseas and to develop new business lines. The international expansion of US financial institutions contributed to the further globalisation of the dollar. However, it was the expansion of a particular new type of financial product that was to turbocharge the growth of dollar-based finance.

In a money-based economy, the price of all assets is referenced to the money unit of account. In allowing the dollar to fluctuate freely, Richard Nixon had unleashed far greater volatility in all financial assets. This created a need for producers, consumers and investors to hedge the risk of large price swings. It also created huge opportunities for financial speculators. With the end of their fixed commission structure in share trading, Wall Street firms were to discover a huge new profit centre in derivatives.