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

[tiddlywinks]

Actually it was the reverse. The Nixon shock was caused by the U.S. government no longer being able to control the price of gold, exactly as Keynes at Bretton Woods predicted would happen. Foreign Central Banks were redeeming dollars for gold at 35$/oz whereas elsewhere gold was selling for 40$/oz. Obviously, an untenable situation.

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.

 

[piezoe]

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.

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.)

 

[Sig]

In 1970, if you bought a car then you were really paying in gold. The US dollar was a gold backed currency. An individual could exchange $35 for an ounce of gold.

The US was running big deficits with the Vietnam war and the welfare state (LBJ's Great Society programs like Medicare). This caused foreigners to start rapidly redeeming gold, and if it continued the US would not have enough gold to meet its obligations. Thus, instead of cutting spending they took the cowardly way out and defaulted on their obligations.

After the US went off the gold standard in 1973, the US dollar became a fiat currency backed by nothing. If you bought a car you were paying for it with pieces of paper. Those pieces of paper only have value if someone else thinks it has value (psychological).

The currency was effectively repriced to reflect all this. The new fiat standard also meant that there were no safeguards in place to stop government spending. On the gold standard the government deficits were limited. On the fiat standard, the government can just endlessly print money.

If you wanted an ounce of gold in 1980 then you needed $700 instead of $35.

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.