IVIV (8): Nixonizing U.S. Currency

[Mark Kohut]

Kevin,

I dwelled on every explication. Thanks much.

 Take the rest of the weeek off and come back and finish. (joke)

Mark

--- On Thu, 10/1/09, kelber at mindspring.com <kelber at mindspring.com> wrote:

> From: kelber at mindspring.com <kelber at mindspring.com>
> Subject: Re: IVIV (8): Nixonizing U.S. Currency
> To: pynchon-l at waste.org
> Date: Thursday, October 1, 2009, 3:19 PM
> Thanks for this, Kevin.  It's
> damned complicated stuff for people like myself who never
> studied econ (outside of selected excerpts from Das
> Kapital).  You're worth every Troy ounce.  And
> kudos for working in a Laugh In phrase -- very Nixon-esque.
> 
> Laura
> 
> -----Original Message-----
> >From: Kevin Troy <kevin.troy at gmail.com>
> 
> >
> >"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...
> >
> 
> 
>