How did we have so much inflation in the 70s?

Discussion in 'Economics' started by Saltynuts, Feb 23, 2021.

  1. tiddlywinks

    tiddlywinks


    You are wrong.

    Before the numerous PIECES of the nixon shock were enacted, Germany and Switzerland had already pulled out of Bretton Woods... removing convertibility of gold into USD at the fixed price represented the US pulling out of BW and collapsing the entire agreement.

    The collapse of BW, which is what my post addressed, is not a chicken egg question.
     
    #31     Mar 17, 2021
  2. piezoe

    piezoe

    I have to respectfully disagree with you. when you say that the Nixon Shock was the "the cause" of the collapse of the Bretton Woods Accord, which didn't really collapse fully until March of 1973. The accord was in trouble long before the Nixon Shock and all the other parties, except France, had informally agreed to stop converting dollars to gold. Effectively, the end date of the BW system was in March 1973 (see below).

    Keynes realized that the BW accord was unsustainable even before the ink was dry in 1944. It was already doomed by the time it was fully implemented in 1958. It was dysfunctional well before 1971. Prior to the Nixon shock, the parties, except for France, had agreed to suspend conversions. It was France's insistence on converting dollars at 35/oz when gold was selling elsewhere for $40/oz that precipitated, by necessity, the Nixon administrations suspension of conversion. (Someone here implied that individuals could convert their dollars for gold at the treasury. Actually that had long been discontinued before the Nixon shock.)

    I pointed out that it was France's insistence on continuing to covert dollars into gold that precipitated the Nixon shock, but that wasn't the fundamental cause the BW system failure. If the Nixon shock didn't cause the collapse of BW what did?

    I would argue that the system was defective from the outset, as it committed the U.S. to supply an ever increasing number of dollars for international commerce, and thus a balance of payments deficit, against a finite amount of gold. This would eventually hamstring the United States own monetary policy. It was only a matter of time, exactly as Keynes had insisted.

    Neither France's continued insistence on converting dollars to gold -- that was the immediate cause of the Nixon Shock -- nor the final end of Breton Woods in March 1973 -- when foreign governments threw in the towell and let their currencies float -- were the real causes of the BW system's failure.

    The reasons for breakdown of BW are well understood. The details, however, are too complex to cover here. However a very knowledgeable and detailed account is available (see Bordo, M.D. "A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, Pgs. 3-108, The University of Chicago Press, 1993.)
     
    Last edited: Mar 17, 2021
    #32     Mar 17, 2021
  3. Sig

    Sig

    Setting the price of gold at $35 an ounce was entirely arbitrary and only went back as far as 1944. It could just have easily been set to $500/oz or $50,000/oz at any point.

    This whole idea that money "used to be backed by something" and "now it's backed by nothing" is quite illusory given that the value assigned to the "something", gold in this case, was just as arbitrarily assigned as the value of a dollar now.
     
    #33     Mar 18, 2021