A chaotic period of unstable exchange rates and high inflation were the aftermath of the “Nixon shock.” Photo: The Washington Post.
The Editorial Board – Financial Times
This week marks 50 years since President Richard Nixon announced to the world that Washington would no longer exchange its dollars for gold. The gold parity, set at $ 35 per ounce, was key to the design of the postwar Bretton Woods system of fixed exchange rates. The so-called “Nixon shock” eliminated that pillar and from there the system collapsed in a short time, fostering a chaotic period of unstable exchange rates and high inflation.
No one should cry for the gold standard. It was time to retire this “barbaric relic,” as Keynes famously called it. A collective commitment to stability, not an arbitrary price for a metal, kept Bretton Woods going for so long. Nor was Nixon’s shock unprecedented; the $ 35 parity had been set by Franklin Roosevelt after devaluing the dollar by dismantling the previous parity with gold. Nostalgia for gold is inadvisable and misplaced.
The same cannot be said, however, regarding the broader intentions of the Bretton Woods concept. Post-1971, global monetary and financial policy has been an attempt to restore the lost stability that the system provided. Central banks required a quarter of a century to establish and refine inflation targeting as a policy strategy to ensure domestic price stability. And yet that success has not guaranteed overall financial stability – as can be seen in the multiple asset bubbles and financial crises since 1980 – and could still collapse due to today’s record lows and high indebtedness.
International stability has been more elusive. While economists and policy managers improved their understanding of floating exchange rates as the post-1971 “non-system” developed, few have become fully comfortable with the new concept. It doesn’t deliver the monetary independence it once promised, and it doesn’t insulate the real economy from financial turmoil, which sometimes actually gets worse. The immense growth of international capital flows has amplified the problem.
Governments have tried various strategies to reduce exchange rate fluctuations. The biggest jump has been the single monetary zone of the EU. Monetary unification is not feasible for other economies and formal peg systems for individual currencies have proven to be ineffective many times.
And even the largest economies have seen the need to contain exchange rate fluctuations, from the Plaza accords of 1985 to reduce the rise in the dollar, to Washington’s ongoing concern about the currency manipulation of others or the handling of the renminbi by others. Beijing.
We may have to live with less stability than we would like. Bretton Woods depended on tight controls on international capital flows and these neither should nor can be reestablished: the integrated global economy of the world depends on the ease and fluidity of financial flows and therefore having them is better. But the half-century quest to find a replacement for Bretton Woods for our era may still be extended.
Closer coordination of macroeconomic policies would help to reduce the instability caused by the wrong assessment of the foreign exchange market regarding the dynamics of prices and deficits between countries. And the most relevant feature of Bretton Woods today is the least remembered. Domestic credit regulation helped insulate local economic growth from international financial pressures. Policy managers are rediscovering this through “prudent macro regulation.”
The lure of gold persists fifty years later, now under the false promise that crypto assets can achieve greater stability than central bank currency. The real lesson of the Bretton Woods teardown is the opposite: gold and its digital equivalents don’t compare to wise regulation and trust between nations.
Copyright – The Financial Times Limited 2021
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