Monday, September 16, 2013

Conrad Black's Richard M. Nixon: A Life in Full 23

My blog post on Conrad Black's Richard M. Nixon: A Life in Full will focus on money supply and the gold standard.

1.  On page 696, we read:

"Unemployment was low, but inflation had risen from 3.3 percent to 5.5 percent under Nixon, and Arthur Burns, who had gone to the Federal Reserve chairmanship in January 1970, was a monetary conservative.  Nixon urged him to expand the money supply, as he had urged during the 1954 and 1958 midterm elections, but Burns declined to do so (as Eisenhower had).  There was virtually no economic growth through 1970."

When the money supply is expanded, that can mean inflation, since, when more money is out there, companies raise prices.  But some people support expanding the money supply as a means to stimulate the economy.  Nixon sometimes favored expanding the money supply for this reason.  Arthur Burns, however, a "monetary conservative" (as Black calls him), was resistant to this.  Ron Paul was a Presidential candidate in 2008 and 2012, and he often spoke in favor of the gold standard and restricting the money supply to combat inflation.  What did Ron Paul think about Arthur Burns?  On pages 115-116 of End the Fed, Paul states: "Following the election of Jimmy Carter in 1976, [Burns] dearly wanted to be reappointed.  He cut the discount rate and accelerated money growth.  True, he was a Republican, but he wanted to go down in history as bipartisan...Sadly for Burns, the courtship failed.  Even more sadly for the country, the courtship wrecked the dollar further."  Paul apparently did not regard Burns as a man of principle in terms of monetary conservatism, at least after Jimmy Carter's election in 1976.

2.  On page 739, we read the following about the Bretton Woods agreement:

"In 1944, the Western countries had agreed at Bretton Woods, New Hampshire, on a new international currency agreement, based on the U.S. dollar and the backing of the dollar by the gold reserves of the United States.  There was gold in the Treasury of the United States to redeem about one-quarter of the outstanding currency, and there were fixed exchange rates with other major currencies, especially the British pound.  This system had worked well for twenty-five years, but now U.S. gold reserves had declined (from $25 billion to $10.5 billion), Europe was back on its feet, Japan was much more powerful economically than it had ever been, the United States was on the verge of running its first trade deficit in over seventy-five years, and gold was clearly under-priced as a commodity, as the dollar was overpriced as a currency.  Gold played an obsolescent and impossible role now because there were at least six or seven other important hard currencies.  Manufacturing in Japan and Western Europe was now extremely competitive..."

That's Black's explanation of the problems in the Bretton Woods agreement, a sort of gold standard (though Ron Paul in End the Fed refers to it as a "pseudo-gold standard"), which Nixon wanted to end.  These problems included a decline of U.S. gold reserves, gold being under-priced, and the need for the U.S. to compete with Europe and Japan, something that the Bretton Woods standard may have been hindering.
Joan Hoff in Nixon Reconsidered is rather critical of Nixon's policy on Bretton Woods.  Her discussion of the rationale behind ending Bretton Woods overlaps with what Black says: "Faced with a gold drain and a trade deficit, the United States allowed the dollar 'to float' on international markets to increase markets abroad and stop any more speculative pressures against the dollar.  This could not be done without causing even more domestic inflation and had to be offset by some deflationary action to placate unions in the form of wage and price controls" (page 140).  But Hoff argues on pages 143-144 that things did not work out as planned:

"Still another unintended consequence arose from the decision to abandon the Bretton Woods system.  This aspect of the NEP represented a deregulation of international currencies.  Since then, economic regionalism has flourished because three rival trading blocs emerged.  Each established a separate regional monetary order based on the yen, mark, and dollar----a situation that has contributed to exchange rate instability and currency speculation since then.  The increased tension among these three major regional trading blocs will continue until the current global recession is over.  What the world learned following the collapse of the Bretton Woods agreement is that floating exchange rates and freer trade do not go hand in hand.  In fact, instability of the former almost always produces complaints about unfair trading practices and pressures for protectionism.  Yet the intensification of regional international competition based on competing currencies...could result in a worsening of worldwide economic conditions in the 1990s.  There is little doubt that the world needs another Bretton Woods system to stabilize currency exchange rates."

I vaguely understand some of this discussion.  I don't entirely comprehend why countries debase their currency in order to make their exports more competitive.  I did a search online to find an answer to my question.  Some of the articles were too abstract for a layperson like myself.  One comment that I read simply said that debasing currency makes exports cheaper abroad, but it did not explain why.

I think that what I see here is a tension between a desire for flexibility and a desire for stability.  The reason that we ended Bretton Woods was probably that it did not allow for the flexibility that we wanted: it was chaining the dollar (not all, but some) to gold, which was not in great supply, and it was hindering the U.S.'s ability to compete.  But Hoff's concern appears to be that eliminating Bretton Woods led to instability: now that currency is not attached to gold but can float freely, there is not much stability in terms of exchange rates.  And countries are concerned that other countries are debasing their currency in order to give their own exports a competitive edge, a practice that they consider to be unfair, and which can encourage them to retaliate with protectionism.

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