Our Story Begins
In August 1971 the US government refused to give European central banks gold owed to them. The euro was set up to ensure this would not happen again.
Martin Selmayr, EU Secretary-General, recently tweeted:
On 15/8/1971 Pdt Nixon used TV (a new medium at the time) to unilaterally end US commitment to the BrettonWoods system. Europe had to react, started work on a Monetary Union which eventually led to the €. Europe needs to take its destiny In its own hands.
That's the first time I saw a top Eurocrat openly discuss the origins of the euro. These three sentences say a lot about the past, present and future of the global economic system. Let’s look at them in detail. The first sentence again:
On 15/8/1971 Pdt Nixon used TV (a new medium at the time) to unilaterally end US commitment to the BrettonWoods system.
The current international financial system was born on August 15th 1971, when US President Nixon went on national TV to cancel international convertibility of the US dollar to gold. Back then, under the Bretton Woods system, foreign central banks could swap US dollars for physical gold at the Federal Reserve. As well as ending gold convertibility, Nixon’s Sunday night TV appearance also ended gold’s central role in the international financial system.
Why did Nixon do this? Under Bretton Woods, nations importing more than they exported would periodically settle the difference by shipping physical gold. In the years before 1971, the US imported a lot more than it exported, so had to send a lot of gold abroad (mostly to Europe). By the time of Nixon’s announcement, America’s gold reserve was down to 8,133 tonnes (from a high of over 24,000 tonnes).
Removing the US dollar-gold link created a problem for the US. Why would foreigners accumulate dollars if they could no longer redeem their dollars for gold?
The solution was the creation of the Petrodollar system. In 1973–4 US Secretary of State Henry Kissinger offered Saudi Arabia a deal; US military protection in return for a global oil market traded in US dollars alone. Saudi Arabia was the world’s leading oil producer, and along with the ‘deal’ was a threat to invade Saudi Arabia and take control of the oil. Saudi Arabia agreed. This meant the US dollar had changed from being a gold-backed currency to an indirectly “oil-backed” currency.
Selmayr’s second sentence:
Europe had to react, started work on a Monetary Union which eventually led to the €
Shortly after the Petrodollar deal was made, the US and Saudi Arabia raised the price of oil by 400%, to boost the US oil industry and reduce dependence on Middle Eastern oil.
Now, Europe had a problem. Aside from not receiving gold owed to them by the US, European nations were suddenly forced to pay a lot more dollars for oil. As Europe has to import most of its energy, large reserves of US dollars were required. A higher oil price threatened balance-of-payments crises in many European countries. This was a starting point for monetary cooperation within Europe as they looked for solutions.
Forty-eight years later, the Petrodollar system is still in place, and significant amounts of oil can only be bought for US dollars. Other nations cannot print US dollars themselves, so must send real goods to the US (or to other nations who will pay dollars) in order to earn the dollars needed to buy oil. The post-1971 international financial system is based on continued issuance of US IOUs (which can be created out of nothing) in exchange for the world’s real resources. This is a key factor in funding the United States’ enormous warfare/welfare state.
Third sentence:
Europe needs to take its destiny in its own hands.
Something similar to the Nixon Shock is on the horizon. By ‘similar’, I mean a sudden change to the international monetary system. There are many possible triggers for such a transition. It might, as in 1971, happen by political decree (a tweet from the US President, perhaps?), or via a market crash. The end of international monetary systems occur periodically and create big winners and losers. Selmayr’s tweet hints that this time, Europe (and the rest of the world) is better prepared than in 1971.
Selmayr reveals a view of the euro that is rarely discussed publicly. European central bankers (and others) have, for decades, quietly prepared for the end of the US dollar system The euro is the fruit of that planning, and it has mechanisms to allow the reintroduction of physical gold to the international financial system – reversing Nixon’s 1971 action. More recently, China has also created structures to de-dollarize commodity markets. A post-dollar international financial system is in largely in place.
We await its activation.
This claim might appear crazy – especially to people in the English-speaking world, who have been successfully persuaded that gold is archaic and has no role in a modern financial system. However, the actions of some major central banks and creditor nations show a different intent.
This is a complicated story and it cannot be summarised easily. However, telling it seems worthwhile. I will do that as simply – and accurately – as possible. That is what this Superbubble is for.
Note.
Video of Nixon speaking on television on August 15, 1971, Sunday night, before the markets opened. Worth watching …
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