IVIV (8): Nixonizing U.S. Currency

[Mark Kohut]

One not-too-controversial ob about Pynchon and the Gold Standard:

World wars linked to hyperinflation....world wars 'paid for" by gold....




--- On Thu, 10/1/09, Kevin Troy <kevin.troy at gmail.com> wrote:

> From: Kevin Troy <kevin.troy at gmail.com>
> Subject: Re: IVIV (8): Nixonizing U.S. Currency
> To: pynchon-l at waste.org
> Date: Thursday, October 1, 2009, 1:24 AM
> "Have you ever looked at a dollar
> bill -- _on weed_?"
> --_Half-Baked_
> 
> I am not an economist, nor do I play one on TV.
> 
> But I sure have taken enough international relations
> courses to take a
> stab at explaining the BRETTON WOODS SYSTEM and its
> collapse in 1971.
> 
> If you'd rather not, the simple answer is that David
> Morris's
> explanation (quoted at the end) is sufficient for most
> Pynchon fans to
> riff on without being Wrong About How Economics
> Works:  the U.S. spent
> too much money on the war in Vietnam, so its currency
> regime collapsed
> underneath it.
> 
> Our story so far:
> 
> At the end of and right after WWII, the Western nations got
> together
> and determined some ground rules for how international
> trade and
> development would be conducted in the post-war world. 
> The reasoning
> was that WWII had been caused, in some ways, by the
> Depression, so
> what the world needed was economic recovery and no more
> Depressions.
> And since failures of international trading regimes -- for
> example,
> the tarrif wars that went on during the early 30s -- had
> been a major
> cause of the Depression, the road to economic recovery and
> stability
> lay (at least partly) through what today the kids are
> calling
> globalization of the economy.
> 
> Lots of formal and informal institutions and arrangements
> came out of
> those meetings, including GATT (the precursor to the World
> Trade
> Organization), the World Bank, and, most important to our
> Nixon
> fixation, a system of fixed exchange rates that was backed
> by the
> International Monetary Fund (IMF).
> 
> Quotation below is from Lairson and Skidmore,
> _International Political
> Economy:  The Struggle for Power and Wealth_, 3rd
> edition, Thomson
> Wadsworth, 2003.
> 
> "The desire for fixed exchange rates was the result of a
> deeply felt
> need for stability in international transactions.... 
> The U.S.
> possessed the vast majority of the world's gold in 1945,
> and this was
> used as the basis for establishing fixed rates.  ...
> [O]ther
> governments fixed their currencies to the dollar and
> pledged to
> intervene in foreign exchange markets to keep values within
> a narrow
> band around the fixed rate."
> 
> So, for example, the Yen was for many years pegged to the
> dollar at a
> 360:1 ratio.  And gold was fixed at a price of $35 per
> troy ounce.
> 
> (If it's not clear to anyone why fixed exchange rates were
> beneficial
> at this time, I can give it another go.  But let's
> move on for now.)
> 
> Now, the fixed exchange rates that came out of Bretton
> Woods were
> backed by U.S. gold.  And the system worked well when
> the U.S. had
> enough gold to back it.  But as dollars (and therefore
> claims against
> U.S. gold) flowed out of the U.S., the U.S. ability to back
> the system
> diminished.  Some of these outflows were for reasons
> that economists
> would consider good:  the U.S. started importing
> things from countries
> like Germany and Japan, which made those countries richer
> and
> therefore less likely to slide back into the Bad Old
> Days.  But some
> of these outflows were because the U.S. was spending too
> much money on
> its military adventures in Southeast Asia.
> 
> Those of you who have read those three insufferably long
> Neal
> Stephenson books about the 17th century might remember the
> business
> where the English keep secreting their gold bullion
> reserves out of
> the Tower of London so they can pay for Spanish materiel to
> fight
> their war against the Dutch -- until there is no more
> gold.  The
> situation by 1970 was like that, except instead of gold
> actually being
> moved physically out of the U.S., it was just pieces of
> paper (or even
> entries in ledgers) that gave people the right to demand
> gold.
> Because of that, the U.S. was able to get away with having
> more
> dollars in circulation outside the U.S. than it actually
> had gold to
> support.  All it _needed_ to have at any one time was
> enough gold to
> satisfy that day's claimants, much as a bank only needs to
> have enough
> cash in its vault to satisfy the withdrawals for the
> day.  But the
> trick was that if everyone cashed in their dollars at once
> (or in
> rapid succession), the U.S. would never be able to provide
> a troy
> ounce of gold for every $35.  They would have to
> drastically increase
> the price of gold (or conversely, decrease the price of
> dollars in
> gold).
> 
> By 1971, the ratio of dollars outside the U.S. to gold
> inside the U.S.
> had gotten so far out of hand, however, that international
> confidence
> in the system was weakening.  And if you remember what
> happened to
> Bear Stearns, you know that confidence is everything in a
> financial
> system.  Let's say one participant "chickens out" and
> cashes in his or
> her $35  for an ounce of gold.  That actually
> further weakens the U.S.
> dollars outside to gold inside ratio, increasing the
> likelihood that
> it will have to stop honoring the $35 price in the future
> (and
> increasing the number of $$ you will have to provide for an
> ounce of
> gold once the system does collapse).  So more people
> will follow the
> lead of the first "chicken," further weakening the system,
> and so on
> in a vicious cycle.  This is a run on the nation's
> central bank.
> 
> In a vicious cycle like that, the central bank will have to
> either
> revalue its currency against its gold standard (to much
> more than $35
> per troy ounce), or cut its currency loose and let it
> "float" in value
> against other currencies.  Nixon chose the latter
> option.
> 
> Now, for those of you who have read this far, a Proverb for
> Paranoids:
>  any time a politician blames "speculators" for recent
> economic
> distress, you can bet your sweet bippy that there's a
> humongous crack
> in the foundations of your nation's economy.  The run
> on the central
> bank won't happen if everyone's confident in the bank's
> ability to
> maintain its pledges, and no one would doubt the bank's
> ability to
> maintain its pledges if you weren't spending
> God-knows-how-much money
> on a foreign war, while simultaneously importing luxury
> goods such as
> steak knives and T.V. sets.
> 
> I'm going to leave off there for now.  If this is
> interesting to you
> folks, I can post more on Friday or Saturday.  Or
> better yet, you can
> read an actual economist on this stuff -- this stuff gets
> even deeper
> when you compare what happened in 1971 to what's been
> happening since
> 2001.  Paul Krugman is good on this stuff.
> 
> 
> 
> 
> On Wed, Sep 30, 2009 at 12:37 PM, pynchon-l-digest
> <owner-pynchon-l-digest at waste.org>
> wrote:
> > From: David Morris <fqmorris at gmail.com>
> > Subject: Re: IVIV (8): Nixonizing U.S. Currency
> >
> > Yeah.  We need a couple, three economists to give us
> the low-down on
> > this Nixon dollar action.  All I could glean was that
> it was in
> > response to inflation resulting from Vietnam war
> spending.  This could
> > be a big clue from TRP...
> 
>