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JC History Tuition Online - Why did Nixon end the Bretton Woods system - Global Economy Notes

Why did Nixon end the Bretton Woods system?

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Topic of Study [For H2 History Students]: 
Paper 1: Understanding the Global Economy (1945-2000)
Section B: Essay Writing
Theme II Chapter 1: Problems of economic liberalisation

Learn more about the historical significance of the Gold Standard [Video by Economics Explained].

Historical background
In 1944, an international monetary agreement was signed in 1944 at the Bretton Woods Conference. Under this agreement, foreign currencies were defined in terms of the US dollar (USD). A new system was established in the post-WWII period to replace the Gold Standard that ended in 1993 following the Great Depression.

Under this system, a fixed exchange rate was established, in which one ounce of gold is equivalent to 35 USD.

When nations participate in a pegged exchange-rate system, they agree to fix the value of their currencies relative to another currency rather than to a commodity such as gold. The US dollar was chosen as the base currency and all the countries agreed to keep the value of their currency within plus or minus 1 percent of a specific value of the dollar. […] In contrast to all other nations, the US currency maintained a relationship with gold fixed at $35/ounce. Thus, because the US dollar remained fixed to gold, this was an indirect gold standard, but nations used US dollars rather than gold to settle international transactions.

An excerpt taken from “International Business: Strategy and the Multinational Company” by K. Praveen Parboteeah and John B. Cullen.

With support from the International Monetary Fund (IMF), an automatic adjustment helped nations to avoid the onset of deflation, thereby maintaining stable exchange rates. By the late 1950s, key trading nations loosened exchange restrictions to accept the international gold standard.

Dollar shortage & the Gold Pool
Following the Second World War, governments in Western Europe imported US-made machinery and merchandise. Consequently, there was a surge in demand for USD, given that more nations underwent post-war economic reconstruction. During the Presidential polls in August 1960, US Senator John F. Kennedy declared his plan to “get America moving again“, giving rise to a ‘gold rush’.

As a result, the increase in market price of gold in London to $40 sparked fears of an unstable USD-gold parity. As such, a “Gold Pool” was created in November 1961, in which eight central banks agreed to buy and sell gold only at the official price of $35. Seven other central banks agreed to provide half of the gold supply to keep the market price of gold stable.

The spike in the London market price sparked fears that governments, seeing the writing on the wall, might demand wholesale conversion of their dollars into gold. In response, the US Treasury provided the Bank of England with gold to be used to bring the price of gold on the London gold market, where the metal was bought and sold by private investors (some would say “speculators”), back down to $35, and the governments of principal industrial countries agreed to refrain from buying gold at a higher price.

[…] What the left hand gave, the right hand taketh away, in other words, in a classic instance of a collective-action problem. As a result, the Gold Pool did little to resolve the internal contradictions of what was now referred to as the Bretton Woods gold-dollar system.

An excerpt taken from “The Bretton Woods Agreements: Together with Scholarly Commentaries and Essential Historical Documents” by Naomi Lamoreaux and Ian Shapiro.

Overvaluation of the USD: A currency crisis and a gold glut
However, the USA faced problems with the system. In the early 1960s, the USA experienced rising inflation. As a result of inflation, the increase in silver prices made it difficult for the USA to ensure adequate circulation of coins and silver certificates. In response, the Congress repealed the Silver Purchase Act in 1963 and enabled the Federal Reserve to produce notes in $1 and $2 denominations. At the same time, silver certificates were gradually retired, thus freeing up the silver holdings for use as coins.

Yet, inflation persisted. In 1968, the Congress repealed the requirement to hold gold reserves against Federal Reserve notes. This led to the collapse of the “Gold Pool”.

By the late 1960s, the inflationary condition exacerbated by the large spending to finance the ‘Great Society’ and the Vietnam War strained the international monetary system. Although a two-tier gold market was created in March 1968, foreign governments viewed it with much skepticism. Central banks were unwilling to accept USD in settlement.

The Bretton Woods was based on gold, but the global gold stock could not meet the world’s demand for international reserves, without which pegged exchange rates were impossible. Consequently, the United States provided dollar reserves by running a persistent balance of payments deficit and promised to redeem those dollars for gold at $35 per ounce. By 1961, however, the amount of dollar claims outstanding began to exceed the US government’s stock of gold. The deficit of gold implied that the United States might not be able to keep its pledge to convert dollars for gold at the official price.

[…] The prospect of a dollar devaluation created strong incentives to exchange dollars for US gold. The US Treasury and the Federal Reserve tried to keep this from happening through stop-gap measures, but they could not solve the underlying paradox: Without additional dollar reserves, the system was unworkable; with additional dollar reserves, the system was unstable.

An excerpt taken from “Currency Stability and a Country’s Prosperity: “Does a Mandatory Currency Stability Law Determine the Stability and or Prosperity of a Country?” by John E. Baiden.

As a result, US President Richard Nixon ‘closed the gold window‘ in August 1971, thereby disallowing foreign central banks from exchanging USD for the US Treasury’s gold. Notably, Nixon blamed other countries for their reluctance to share the military burden of the Cold War, which in turn contributed to the persistent balance of payments deficit.

What can we learn from this article?
Consider the following question:
– How far do you agree that the problems of the Crisis Decades were the result of American economic policies?

Join our JC History Tuition to learn more about the Global Economy. The H2 and H1 History Tuition feature online discussion and writing practices to enhance your knowledge application skills. Get useful study notes and clarify your doubts on the subject with the tutor. You can also follow our Telegram Channel to get useful updates.

We have other JC tuition classes, such as JC Math Tuition. For Secondary Tuition, we provide Secondary English Tuition, Secondary Math tuition, Secondary Chemistry Tuition, Social Studies Tuition, Geography, History Tuition and Secondary Economics Tuition. For Primary Tuition, we have Primary English, Math and Science Tuition. Call 9658 5789 to find out more.

JC History Tuition Online - What is the steel trigger price mechanism - Global Economy Notes

What is the steel trigger price mechanism of 1978?

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Topic of Study [For H2 History Students]: 
Paper 1: Understanding the Global Economy (1945-2000)
Section B: Essay Writing
Theme II Chapter 2: Reasons for problems of the global economy

Find out more about the protectionist policies set by past administrations in the USA that affected the steel industry [Video by MarketWatch].

Historical background: Intensified competition
In the post-WWII years since the 1950s, world steel exports have increased tremendously. Yet, the key exporter USA faced a decline. One possible reason raised by steel producers is traced to ‘dumping‘.

According to the Word Trade Organisation (WTO), ‘dumping’ refers to a practice in which the “price of a product when sold in the importing country is less than the price of that product in the market of the exporting country”. It is arguably a destructive policy that undermines the trading partner’s industry-specific interests.

Yet dumping is more often perceived as being harmful to the importing country. At its worst, price discrimination in international trade may be a weapon of economic warfare. An exporter may sell goods cheaply in a foreign market with the intent to drive out competition or to prevent the establishment of a rival industry. After competition has been eliminated, the exporter may raise prices to the detriment of the same consumers who had temporarily benefited from bargain prices.”

An excerpt taken from “The Reinstated Steel Trigger Price Mechanism: Reinforced Barrier to Import Competition” by Garry P. McCormack.

The ‘steel’ problem worsened as the world entered a decade of high oil prices in the 1970s. As a result of the twin oil shocks, inflation contributed to higher steel prices, which forced businesses to explore alternative materials like plastic and aluminum to replace steel in the production of appliances and cars. Consequently, the demand for steel declined.

As early as 1959, the United States imported more steel than it exported. By 1970, the U.S. share of world steel production had plummeted to 20 percent, down from 50 percent in 1945. Steel production then fell from 130 million tons in 1970 to 88 million tons in 1985.

An excerpt taken from “Understanding Globalization: The Social Consequences of Political, Economic, and Environmental Change” by Robert K. Schaeffer.

The Eagle Strikes Back: Steel trigger price mechanism
In response to the American steel industry’s claim that foreign producers were ‘dumping’ steel in the US market, the Carter administration introduced the trigger price mechanism (TPM) in 1978. The TPM sought to identify steel imports sold at unfairly low prices, prompting legal intervention.

There were three aims of the TPM:

  • Support the enforcement of existing anti-dumping laws
  • Promote higher import prices and lower import volume to stimulate the domestic steel industry
  • Avoid the use of undesirable protectionist policies

True enough, the price of imported steel increased by 10% a year later. At the same time, US steel exports rose by 3.1 million tons and employment of steel workers increased by 12400.

Yet, there were shortcomings for the use of the TPM. One such consideration was the legality of selling steel below the trigger price, which led to a large influx of European steel in 1981.

It was legal to sell at less than the trigger price as long as steel was not sold at less than fair value. Apparently, many firms decided to do just that, as shown by the European requests for preclearance. Depreciation of European currencies relative to the U.S. dollar lowered European production costs relative to trigger prices. […] European Economic Community (EEC) steel producers increased their tonnage sold in the United States by 63 percent.

An excerpt taken from “Economic Commentary: The Steel Trigger Price Mechanism” by Gerald H. Anderson.

In January 1982, the Commerce Department processed 132 anti-dumping and countervailing duty cases filed by 7 domestic firms. Subsequently, the TPM was suspended. Notably, US protectionist policies took other forms as well, such as the imposition of steel tariffs under the Reagan administration.

What can we learn from this article?
Consider the following question:
– How far do you agree that the rise of trade protectionism was the result of American policies in the 1970s?

Join our JC History Tuition to learn more about the Global Economy. The H2 and H1 History Tuition feature online discussion and writing practices to enhance your knowledge application skills. Get useful study notes and clarify your doubts on the subject with the tutor. You can also follow our Telegram Channel to get useful updates.

We have other JC tuition classes, such as JC Math Tuition. For Secondary Tuition, we provide Secondary English Tuition, Secondary Math tuition, Secondary Chemistry Tuition, Social Studies Tuition, Geography, History Tuition and Secondary Economics Tuition. For Primary Tuition, we have Primary English, Math and Science Tuition. Call 9658 5789 to find out more.

JC History Tuition Online - How did the 1973 Oil Crisis affect the United States - Global Economy Notes

How did the 1973 Oil Crisis affect the United States?

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Topic of Study [For H2 History Students]: 
Paper 1: Understanding the Global Economy (1945-2000)
Section B: Essay Writing
Theme II Chapter 2: Reasons for problems of the global economy

Learn more about the 1973 oil crisis that hit the USA adversely. [Video by WFAA]

Weaponisation of the ‘Black Gold’: Yom Kippur War
During the 1973 Yom Kippur War, the USA launched Operation ‘Nickel Grass’, which was a strategic operation to send military supplies to its ally, Israel. Between October and November 1963, the USA aided Israel to counter a coordinated attack from Egypt and the Syrian Arab Republic. Armed with Soviet weaponry, these two nations fought back after their defeat in the Six-Day War of 1967.

Neither as well known as the Berlin Airlift nor as large as Desert Storm, Operation Nickel Grass airlifted thousands of tons of materiel and restored the balance of power, helping Israel survive the Soviet-backed assault from Egypt and Syria.

[…] The Egyptian Third Army pretended to conduct exercises until the Israelis began to ignore their machinations. Choosing the most holy day in the Jewish calendar, Yom Kippur, the Day of Atonement, in hopes of catching the Israelis off-guard, the Egyptians attacked across the Suez Canal.

An excerpt taken from “Air Warfare: An International Encyclopedia” by Walter J. Boyne.

Viewed as an act of defiance, the oil-exporting Arab nations that were part of the Organisation of Petroleum Exporting Countries (OPEC) imposed an oil embargo on the United States and other countries that helped Israel (such as Britain).

Four days after President Nixon’s authorisation of US aid to Israel, OPEC announced its decision to raise oil price by 70%, which was over $5 per barrel. Later, a total embargo on shipments of oil to the USA caused the oil price hike to $12 per barrel.

Oil shortage
By the summer of 1973, the USA experienced shortages of refined petroleum products, which were used extensively in activities such as refueling of automobiles. In response to the serious problem, the Emergency Petroleum Allocation Act (EPAA) was passed on 27 November 1973. The EPAA oversaw the control of oil prices and even rationing.

The retail prices of gasoline rose by 40% in November 1973. Long lines of cars were a common sight back then during the gas shortage. Gas stations revised their prices multiple times per day. Unfortunate drivers were met with signs that wrote “Sorry, No Gas Today” in the fall months.

On 17 March 1974, the Arab petrostates announced the end of the oil embargo against the USA. However, the economic repercussions were widespread. The 1973 oil crisis has caused prolonged economic stagnation. The American economy shrank by 2.5% and increased unemployment rate.

The American economy was shedding jobs at the fastest rate since the Great Depression. The deficit was climbing. Inflation had roared to life. Consumers were cutting back on spending. The export sector had slumped because of falling demand for American goods overseas. Factories were closing down. A noxious economic phenomenon known as “stagflation”—high levels of unemployment and inflation—had taken root. If relief did not come soon, feared some economists, then a financial catastrophe on a par with the Great Crash of 1929 could not be ruled out.

An excerpt taken from “The Oil Kings: How the U.S., Iran, and Saudi Arabia Changed the Balance of Power in the Middle East” by Andrew Scott Cooper.

What can we learn from this article?
Consider the following question:
– Assess the view that the 1973 oil crisis devastated the American economy.

Join our JC History Tuition to learn more about the Global Economy. The H2 and H1 History Tuition feature online discussion and writing practices to enhance your knowledge application skills. Get useful study notes and clarify your doubts on the subject with the tutor. You can also follow our Telegram Channel to get useful updates.

We have other JC tuition classes, such as JC Math Tuition. For Secondary Tuition, we provide Secondary English Tuition, Secondary Math tuition, Secondary Chemistry Tuition, Social Studies Tuition, Geography, History Tuition and Secondary Economics Tuition. For Primary Tuition, we have Primary English, Math and Science Tuition. Call 9658 5789 to find out more.

JC History Tuition Online - What was Ronald Reagan's Strategic Defense Initiative - Cold War Notes

What was Ronald Reagan’s Strategic Defense Initiative?

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Topic of Study [For H2 and H1 History Students]: 
Paper 1: Understanding the Cold War (1945-1991)
Section A: Source-based Case Study
Theme I Chapter 3: End of Bipolarity [US policy of renewed containment and confrontation]

Let’s take a look at the Strategic Defense Initiative (SDI) and its significance during the Cold War in the 1980s. [Video by SideProjects]

Historical context: Peace through strength
After the Soviet invasion of Afghanistan in 1979, the short-lived Détente was over, ushering a time know as the ‘Second Cold War‘. Then, US President Ronald Reagan assumed a more confrontational stance against the Soviet Union, asserting that the ‘Evil Empire’ had to deterred through military build-up.

By the early 1980s, there were anti-nuclear demonstrations taking place in the USA, which had put pressure on Washington to support ‘nuclear freeze’. Yet, Reagan opposed this approach, claiming that the Soviet Union’s aggression would put the USA and its people in grave danger.

I know too that many of you seriously believe that a nuclear freeze would further the cause of peace. But a freeze now would make us less, not more, secure and would raise, not reduce, the risks of war.

[…] It is that we embark on a program to counter the awesome Soviet missile threat with measures that are defensive. Let us turn to the very strengths in technology that spawned our great industrial base and that have given us the quality of life we enjoy today. What if free people could live secure in the knowledge that their security did not rest upon the threat of instant U.S. retaliation to deter a Soviet attack, that we could intercept and destroy strategic ballistic missiles before they reached our own soil or that of our allies?

An excerpt from US President Ronald Reagan’s speech entitled “Address to the Nation on Defense and National Security“, 23 March 1983.

A “Star Wars program”: Fiction or Reality?
During the historic speech, Reagan had revealed to the American people that a technologically-advanced missile defense system was being developed, which was later known as the Strategic Defense Initiative (SDI). Notably, when Reagan was a governor of California in the 1960s he became very interested in the concept of directed-energy weapons (DEWs), which was briefed by physicist Edward Teller. Teller mentioned that DEWs, which included lasers and microwaves, could act as an effective defense against a nuclear attack.

To begin with, SDI became an easy object of derision in the British press. The Guardian reported that there was ‘little hope’ of SDI ever succeeding, and a generally dismissive tone dominated that newspaper, labelling SDI an unrealistic fantasy. Cartoons poked fun at Reagan’s initiative, quickly labelled ‘Star Wars’ by US Senator Ted Kennedy, and reiterated on Time magazine’s front cover in April 1984. Of course, SDI was officially declared to be defensive in nature, which was a useful imaginary to promote.

An excerpt from “NATO and the Strategic Defence Initiative: A Transatlantic History of the Star Wars Programme” by Luc-André Brunet.

On 25 February 1981, President Reagan signed the National Security Decision Directive (NSDD) 12, known as the Strategic Forces Modernisation Program. The Directive had authorised an improvement of strategic defenses and the development of ‘ballistic missile defense systems’.

The proposed SDI program was a space-based missile defense system that could protect the USA from a large-scale nuclear attack. It involved the use of space-based lasers, which reminded some of the popular science fiction film ‘Star Wars’ by George Lucas. (Interestingly, the trilogy was released in 1977, 1980 and 1983).

Although the program sounded absurd and unrealistic, the Reagan Administration was intent on developing the system to nullify the Soviet Union’s ability to make a first strike, thus giving the USA a chance to end the Cold War.

On the other hand, the Kremlin viewed the SDI as a serious breach to global peace and security as Reagan’s plans signalled the US decision to restart the arms race in the early 1980s.

And critics were certainly correct in predicting that Reagan’s proposal would anger the Soviet Union. Four days after Reagan’s surprise speech, Yuri Andropov (1914-1984), who had replaced Brezhnev, called SDI “irresponsible” and “insane”. He said the initiative was “putting the entire world in jeopardy.” He predicted it would “open the floodgates of a runaway race of all types of strategic arms, both offensive and defensive.”

An excerpt from “America’s Star Wars Program” by Ann Byers.

What can we learn from this article?
Consider the following question:
– How far do you agree that Reagan was responsible for the end of the Cold War?

Join our JC History Tuition to learn more about the End of the Cold War. The H2 and H1 History Tuition feature online discussion and writing practices to enhance your knowledge application skills. Get useful study notes and clarify your doubts on the subject with the tutor. You can also follow our Telegram Channel to get useful updates.

We have other JC tuition classes, such as JC Math Tuition. For Secondary Tuition, we provide Secondary English Tuition, Secondary Math tuition, Secondary Chemistry Tuition, Social Studies Tuition, Geography, History Tuition and Secondary Economics Tuition. For Primary Tuition, we have Primary English, Math and Science Tuition. Call 9658 5789 to find out more.

JC History Tuition Online - How did the USA help Japan's economy after WW2 - Global Economy Notes

How did the USA help Japan’s economy after WW2?

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Topic of Study [For H2 History Students]: 
Paper 1: Understanding the Global Economy (1945-2000)
Section B: Essay Writing
Theme II Chapter 1: Reasons for growth of the global economy

Learn more about the post-war economic developments of Japan. [Video by ‘How’d it happen?]

A shift of US priorities in Japan: ‘Reverse Course’ policy
After Japan was defeated in World War Two, the Allied Occupation oversaw social and political reform of Japan from 1945 to 1946, ensuring that it would not endanger world peace. Under the Supreme Commander for the Allied Powers (SCAP) led by American general Douglas MacArthur, the Japanese military was disbanded and the zaibatsu conglomerates were broken up.

Against the backdrop of the looming Cold War tensions in Europe, the US government relooked its priorities. Instead of punishing Japan for its wartime aggression, the government supported the post-war recovery of Japan, in hopes of cultivating it as a new Cold War ally. This was also known as the ‘Reverse Course’ policy (逆コース).

After the early stages of the Occupation, SCAP began showing a strong interest in stabilizing Japan’s economy near the end of 1946. In spite of the fact that the “Basic Directive” clearly stated that the Occupation would not be responsible for economic reconstruction, faced with the danger of rampant inflation unless production restarted, SCAP had no choice but to become involved in economic reconstruction.

An excerpt from “The Economic History of Japan: 1600-1990: Volume 3: Economic History of Japan 1914-1955: A Dual Structure” by Takafusa Nakamura, Konosuka Odaka and Noah S. Brannen.

Consequences of warm bilateral relations: US aid to Japan
In 1958, negotiations for a US-Japan Security Treaty (日本国とアメリカ合衆国との間の相互協力及び安全保障条約) were underway. In essence, the treaty permitted US military bases in Japan, thereby establishing a military alliance between the two countries.

At the same time, the USA provided a series of economic assistance to build up Japan as a bulwark against communist expansion in Asia. For instance, the US government offered low-interest loans to Japan. These substantial capital injections led to increase in Japanese investments that propelled economic growth.

Additionally, the USA sponsored Japan’s admission to the General Agreement on Tariffs and Trade (GATT) organisation in September 1955. The USA feared that an absence of market for Japanese exports may possibly draw Japan into the Communist bloc for economic cooperation. As such, the Eisenhower administration rejected protectionist demands from local groups in the USA and opened American markets to Japanese exports.

The United States needed Japan as a stable capitalist country that would provide a bulwark against communism in Asia. It therefore supported Japanese membership of the IMF and GATT in 1955 and assisted Japan in improving relations with other Asian countries in the late 1950s and early 1960s, while at the same time keeping its own market open to Japanese goods and making technology and capital available to Japanese enterprises. Japanese capitalism could thus pursue its own interests on the international stage under the umbrella of U.S. world strategy.

An excerpt from “Japanese Capitalism Since 1945: Critical Perspectives” by Tessa Morris-Suzuki and Seiyama Takuro.

From 1958 to 1960, US purchases from Japan rose by more than 150%. This enabled Japan to enjoy its first-ever trade surplus. The correction of Japan’s balance of payment deficits thus allowed it to grow rapidly.

What can we learn from this article?
Consider the following question:
– Assess the importance of the USA in contributing to the economic miracle of Japan after 1945.

Join our JC History Tuition to learn more about the growth of the Global Economy, including the economic miracle of Japan and Western Europe. The H2 and H1 History Tuition feature online discussion and writing practices to enhance your knowledge application skills. Get useful study notes and clarify your doubts on the subject with the tutor. You can also follow our Telegram Channel to get useful updates.

We have other JC tuition classes, such as JC Math Tuition. For Secondary Tuition, we provide Secondary English Tuition, Secondary Math tuition, Secondary Chemistry Tuition, Social Studies Tuition, Geography, History Tuition and Secondary Economics Tuition. For Primary Tuition, we have Primary English, Math and Science Tuition. Call 9658 5789 to find out more.