According to my work experience at the State Administration of Foreign Exchange from 1997 to 2007, even if a fixed exchange rate is implemented, the exchange rate will sometimes be strong and sometimes weak. Although this strength cannot be reflected in the fluctuation of the nominal exchange rate, it will manifest itself in other forms. From 1997 to 2005, the RMB exchange rate was actually a fixed exchange rate pegged to the US dollar, but this did not affect the obvious depreciation expectations of the RMB from 1998 to 2002, so that the black market exchange rate would require 10 to 12 RMB in extreme cases. Converted to 1 U.S. dollar; of course, before the exchange rate reform from 2002 to 2005, there was actually an expectation of appreciation of the renminbi. At that time, there was a view that the exchange rate of renminbi to the dollar would rise to 6. Under the Bretton Woods system that implements the gold exchange standard, the US dollar exchange rate is the same. We can observe the outflow and inflow of gold in the U.S. to judge the strength of the U.S. dollar. The outflow of gold from the U.S. means that the U.S. dollar is weak, and the inflow of gold into the U.S. means that the U.S. dollar is strong. We can use the price of gold and changes in the direction of gold flow to find the U.S. dollar exchange rate hidden behind it. Strong and weak fluctuations.
Based on this idea, Zhang Antian of the China Merchants macro team used a series of indicators such as gold inflows and outflows, virtue spreads, and so on to estimate the dollar trend from 1958 to 1971, and the results perfectly presented the 16 to 18-year cyclicality of the dollar. I hope to further find some historical facts as supporting evidence, which will not only make the research conclusions more reliable, but also make the research report more interesting. The book “Gold, Dollar and Power” fits this need.
After 1956, the U.S. balance of payments situation changed. “Gold, the U.S. Dollar, and Power” pointed out at the beginning: The Eisenhower Administration has worked hard to curb the continuous outflow of gold from the United States since the end of 1957. The then U.S. Treasury Secretary Anderson pointed out that our balance of payments situation has undergone significant changes since 1956. As the situation of the loss of gold in 1958 deteriorated, the U.S. official view quickly changed, and the U.S. government began to pay attention to the issue of gold outflow and the value of the U.S. dollar. Based on this speculation, 1956 should be the first turning point for the US dollar from strong to weak after the establishment of the Bretton Woods system.
In 1958, the United States lost $3.4 billion in gold and liquid dollar assets, while Western Europe gained $3.7 billion. Therefore, the dollar is weak-gold flows out of the United States-the cost of US troops in Western Europe has become an equating issue. This entangled international political and economic issue is the core issue studied in the book “Gold, U.S. Dollar, and Power.”
Coincidentally, the economist Krugman mentioned in the textbook “International Economics” (Fifth Edition, Renmin University of China Press, 2002): “Foreign central banks spent nearly US$2 billion in 1960. The reserves were converted into gold. Prior to this, in 1958 and 1959, they had exchanged about 3 billion U.S. dollars. 1960 marked the end of the “dollar shortage” era and the beginning of a period of fear that the U.S. depreciated the U.S. dollar against gold. “.
The 1960 gold crisis meant that the US dollar index confirmed its first bottom. “Gold, the U.S. Dollar and Power” mentioned: Previously, the price of gold in the London market (free market) gradually rose from US$35 per ounce to US$40 per ounce. On October 25, 1960, the price of gold in the London gold market soared to US$40.60 per ounce, and the financial world was in panic. Such a huge price difference has caused the market to worry that a large number of investors buy gold from the United States for $35 and then sell it on the London market. This move may lead to the rapid depletion of US gold reserves. In November 1960, U.S. Treasury Secretary Anderson announced that the U.S. gold reserves would soon be less than $18 billion. “This is the first time in many, many years.”
In 1961, the United States began to implement a series of measures to restore the value of the dollar. President Kennedy took office in January 1961. Similar to Eisenhower, Kennedy also believed that generous political and security policies toward Europe—mainly the decision to deploy six divisions in the Federal Republic of Germany—as the root cause of the US currency woes. The balance of payments deficit is basically the same as the foreign exchange expenditures generated by this commitment. Neither Kennedy nor his advisers believe this fact is just a coincidence. Of course, Germany and France, the largest surplus countries, believe that the outflow of US gold is a temporary imbalance caused by the US’s uncontrolled policies and cyclical factors. With the threat of withdrawal from Western Europe, the United States has promoted the following five measures to reduce the outflow of gold, improve the balance of payments, and stabilize the exchange rate of the U.S. dollar:
First, by threatening to withdraw troops from Western Europe, Germany and others are required to assume economic obligations. In 1961, the threat came into effect. Germany changed its international reserve management policy, held surplus dollars and stopped buying gold. Early repayment of $587 million in post-war debts. Lifting trade restrictions on U.S. poultry meat. Increase foreign aid projects. The German mark appreciated by 5%. Conduct military procurement negotiations. However, the negotiations between the United States and France, Italy, Japan, Belgium, the Netherlands and other countries have not progressed smoothly or achieved little results. The main surplus country at this time was Germany, just like Japan from the 1970s to the 1980s, and China from 2000 to the present.
Secondly, it has established gold pools with many countries to intervene in the London gold market. The gold pool agreement (goldpool agreement) Switzerland, the Federal Republic of Germany, Italy, the Netherlands, France, Belgium, and the United Kingdom agreed to cooperate with the United States to use part of its gold stocks to suppress gold prices in the London market. This form of cartel has curbed the power of speculating gold in the market for a long period of time. After the launch, from 1961 to 1963, the net gold position of the United States fell by only $1.35 billion. This means that during this period the shadow exchange rate of the U.S. dollar changed from weak to strong.
Third, seek the support of France through negotiations. The Kennedy administration believed that the US dollar and gold issues could be resolved in two ways: either by cooperating with European surplus countries, namely Germany and France, or by withdrawing troops from Western Europe on a large scale. France’s attitude is very tough, which contrasts with Germany’s submissive attitude. Treasury Secretary Dillon told President Kennedy that it must be recognized that the US dollar held by France represents both a political issue and an economic issue. French newspapers wrote an article to remind de Gaulle to always be prepared to show his large amount of US dollars, the diplomatic trump card that France holds. Charles de Gaulle can put pressure on Kennedy by buying gold from the United States (this is the same as that during the Sino-US trade friction, when some experts suggested that China dump U.S. debt to pressure the United States). The situation changed slightly in 1962. In July 1962, the then French Finance Minister Destin negotiated with the United States at the time and was willing to hold U.S. dollars for a period of time. It should be noted that the U.S. Treasury had 16 billion U.S. dollars in gold in 1962, but 12 billion U.S. dollars of it were required by law to provide support for domestic currency. The total external debt of the US dollar exceeds US$20 billion, and they can ask the US to convert it into gold at any time. This shows that the cooperation between Germany and France, the largest creditor country, is crucial to the stability of the dollar.
Fourth, oppress the central banks of relevant countries to hold U.S. dollars instead of exchanging gold with the United States. In mid-1967, there was a surplus of US$27 billion overseas, of which US$12 billion was held by central banks. The loss of gold from 1963 to 1965 was less than US$2 billion. Although the United States had an annual balance of payments deficit of more than US$3 billion, under the pressure of the United States, overseas central banks chose to hold more than US$11 billion in US dollar claims instead of converting to the United States for gold. .
Fifth, the United States implements relatively tight macroeconomic policies. In 1961, Kennedy followed the advice of monetary conservatives, Secretary of the Treasury Douglas Dillon, and ignored the economic, fiscal and monetary policy calls of the Economic Advisory Committee, including: lower interest rates, increased government spending and tax cuts.
When the Johnson administration announced the Special Drawing Rights program in the summer of 1965, the balance of payments situation in the United States was much better than it was in the late 1950s. Krugman’s “International Economics” also mentioned: The United States was a period of calm from 1961 to 1965, when current account surpluses increased, and the threat of large-scale gold runs by foreign banks also decreased.
1967 may be a period high of the US dollar exchange rate. In the spring of 1967, the United States, Britain and Germany successfully negotiated a compensation agreement. Germany promised to purchase military equipment and long-term debt to compensate for the cost of the garrison. The Bundesbank holds the most U.S. dollars and promises not to exchange for gold. In 1967, there was a school of cautious optimism. It can be inferred from this that the shadow exchange rate of the U.S. dollar remained strong in the seven years from the low of 1960 to 1967.
The international factors that led to the sharp turnaround of the dollar situation are teammates-Britain and the British pound. From 1964 to 1966, the British pound encountered the same problems as the U.S. dollar-the balance of payments deficit, the outflow of gold, and the pressure on the exchange rate. The United States was worried that Britain’s withdrawal from East Asia, the Middle East and Germany would increase the burden on the United States, and that the collapse of the pound sterling would affect the confidence of the dollar, so it had to help save the pound for three consecutive years from 1964 to 1966. In hindsight, the three pound crises in November 1964, June 1965 and July 1966 were a preview of the dollar crisis, but the market ushered in a brief calm at that time.
The depreciation of the British pound in 1967 weakened the U.S. dollar and greatly increased overseas demand for gold. In 1967, the Middle East crisis closed the Suez Canal and blocked British exports. Arab countries with large deposits of pound sterling converted it into US dollars. In the spring of 1967, the pound suffered a strong speculative impact. (At this time, the pound is weak and the dollar is strong). On November 18, 1967, Prime Minister Johnson announced the depreciation of the British pound from 2.80 U.S. dollars to 2.40 U.S. dollars.
France is adding fuel to the fire at this time. France withdrew from the gold bank in the summer of 1967 and made the information public through the media. “The attitude of the French government and the actions of some French officials are important factors that have caused large-scale speculative attacks on the US dollar and gold.”
The domestic factors that led to the sharp turnaround of the dollar situation are the Fed’s loose monetary policy and the proactive fiscal policy of the Ministry of Finance. According to Krugman’s “International Economics”: “At the end of 1967 and early 1968, private speculators began to hoard gold in anticipation that the price of gold might rise.” “The view at the time was that this was the result of the devaluation of the British pound in November 1967. However, the sharp expansion of the U.S. currency in 1967 and the rise in inflation also affected speculators’ expectations.” “The Federal Reserve had to choose a much looser monetary plan from 1967 to 1968.” The facts once again show that the Fed Loose monetary policy is a prerequisite for the conversion of the strength of the dollar.
“Gold, the U.S. Dollar, and Power” believes that the U.S. balance of payments deficit increased explosively in 1967 due to inflationary pressures brought about by the Vietnam War and the great social plan. The fourth quarter of 1967 was the worst currency crisis the United States faced after the war. The balance of payments deficit in the fourth quarter alone was worse than any year in history. A large amount of funds fled the U.S. dollar, the gold pool collapsed, and countries other than the gold pool converted U.S. dollars into gold at an alarming rate. The gold in the U.S. treasury was close to the minimum level required by law to support domestic currency.
The gold crisis of 1968. The plan announced by the United States on New Year’s Day in 1968: strictly control capital and overseas borrowing. It began to be recognized by the market, but the New Year offensive on the Vietnamese battlefield on January 31 and the clearing of the gold warehouse shaken confidence. The loss of the gold pool intensified in March. The gold crisis broke out in March 1968. Starting on March 15th, the London gold market was closed. In subsequent negotiations with central bank governors, central bank governors agreed not to buy or sell gold in the London market. This makes the world de facto enter the dollar standard system. The private gold market is separated from the central bank’s gold market.
In August 1971, Nixon announced the decoupling of the U.S. dollar and gold. On August 8, 1969, the franc depreciated by 11.5%. Soon afterwards, Germany adjusted the mark exchange rate. In 1971, the Fed’s loose monetary policy caused the US dollar to flood into Europe. The United States’ balance of payments deficit in the first half of 1971, calculated on an annual basis, reached a staggering 22 billion U.S. dollars. On August 6, the House of Representatives International Transaction and Income and Expenses Committee reported that the U.S. dollar was overvalued. This report caused a new wave of selling dollars. Central banks intervened to support the U.S. dollar. On August 13 (Friday), the Bank of England asked the Fed to guarantee some of its U.S. dollar holdings. On August 15th, Nixon made a national television speech, announcing the decoupling of the U.S. dollar and gold.
At this time, Fed Chairman Walker and the new Treasury Secretary Schultz, a student of Friedman, both advocated that the market determine the exchange rate. When Europe and Japan proposed to rebuild a fixed exchange rate system, Schultz announced to the world that the era of the United States as the caretaker of the global payment system was over. “Santa Claus is dead (SantaClausisdead).”
In February 1972, President Nixon visited China. An old period has passed, and a new era has begun. Behind this, the US dollar continues its inherent volatility according to its own cycle.