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The Nixon Shock Doctrine Revisited

FLORENCE – Richard Nixon has been dead for 15 years, but he is making another comeback in America. The 37th President of the United States believed that international monetary relations are unlikely to be transformed by talking. Instead, he thought that radical unilateral action was required. Today, pressure is increasing for the US Treasury to follow Nixon’s misguided example and issue a finding (due by April 15th) that China is manipulating its exchange rate.

Some 130 members of Congress have signed a letter demanding action on China’s currency. The campaign is enthusiastically endorsed by a leading US economist and trade specialist, the Nobel laureate Paul Krugman.

From today’s perspective, the problems of the Nixon era look relatively manageable, even trivial. The world’s currency reserves were held in a slightly lop-sided way: at the end of 1971, Germany had reserves worth $17.2 billion, and Japan’s were worth $14.1 billion – 14% and 11.5% of the world’s total, respectively. In 2008, the last year for which figures are available, Japan held 23.4 % of the world’s reserves and China held 44.8%. These figures are even higher today.

In 1971, Americans were feeling the effects of a German and Japanese export surge. Germany had a current-account surplus of 2.1% of GDP at the time, while Japan’s was 4.4%. In 2008, the Japanese surplus was 3.2% of GDP, Germany’s was 6.7%, and China’s was 9.8%.