Every era’s monetary and financial institutions are unimaginable until they’re real

That is the column subtitle, the actual title is “The Lesson of Bretton Woods.”  Note that yesterday was the 75th anniversary of the signing of the final agreement.  Here is one excerpt:

The Bretton Woods arrangements also seemed highly unlikely until they were in place. They involved a complicated system of exchange rate pegs, capital controls and a “gold pool” (and other methods) to control gold prices and redemption ratios. What’s more, the whole thing was dependent on America’s role as global hegemon, both politically and economically. The dollar still was tied to gold, and the other major currencies tied to the dollar, but as the system evolved it required that no one was too keen to redeem dollars for gold (the French unwillingness to abide by this stricture was one proximate cause of the collapse of Bretton Woods).

I don’t think a monetary economist from, say, 1890 could have imagined that such an arrangement would prove possible, much less successful. Yet the Bretton Woods arrangements had a wonderful track record, as the 1950s and 1960s generated strong economic growth for both the U.S. and Western Europe.

At the same time, once Bretton Woods ended in the early 1970s, few people thought it was possible to turn back the clock. The system required the U.S. to be a creditor nation, to hold much of the world’s gold stock, and for countries such as France to defer to American wishes on gold convertibility. Once again, the line between an “imaginable” and “unimaginable” monetary arrangement proved to be a thin one.

As I point out in the piece, today’s arrangements of fiat currencies and (mostly) floating rates were unimaginable to most previous thinkers, including Keynes.  Here is the column’s closing bit:

So as you consider the legacy of Bretton Woods this week, remember that core lesson: There will be major changes in monetary and institutional arrangements that no one can even imagine right now. Assume the permanency of the status quo at your peril.


"Every era’s monetary and financial institutions are unimaginable until they’re real"

Indeed! Central banks printing money to buy everything including equities! I never thought I'd see the day.

Indeed. Dare I say the next stage will be acceptance of money financed fiscal programs, as advocated by Ray Dalio or Adair Turner.

And indeed, what makes more sense? Trying to stimulate aggregate demand through the claptrap of the Federal Reserve and the commercial banking system, or giving tax cuts to wage earners ( with tax losses offset by the issuance of bonds which are then purchased by the central bank but held-to-maturity).

$22T at near or zero interest. Why am I still paying taxes? Why are we taxing labor at all?

I say this rarely, but good for the French.

I wish I could pull it up again, but there's a chart which measures the approximate valuation of gold/silver controlled for CPI and moderated against major spikes/decreases in supply (the discovery of the Americas, trade with China, etc.). Not to put to fine a point on it, but an ounce of gold is roughly equivalent in purchasing power today what it was 2000 years ago or even long before that.

I guess maybe we need a longer sample timeline, but my 'money' is still on physics and geologically limited resources holding that trendline than fiat or its many offspring. Do your worst.

I'm sort of a gold bug. I hold 6% of total assets in gold bullion coins, and 2.5% in cash and equivalents. I'm slowly adding gold, mainly to bequeath a set number of ounces to my heirs.

I look at the ratio of the DJIA to gold. Tradition (for what that's worth) looks at "equilibrium" as 10:1. Today's close at 4PM the ratio is 19.3:1 (27,350/1,417) - gold "cheap" to the DJIA.

Both the DJIA (from its Christmas Eve debacle) and gold have rallied since 12/31/2018, from 23,327 and $1,285, respectively.

History. In 1980, gold first crossed $800 ($875 high). The D/G ration was about 1:1, way below 10:1 - avoid gold. During the dot.com bubble, the D/G ratio was 40:1 (11,500/290) - avoid stocks. In 2001, gold hit a low of $252 per ounce. In August 2011, it was 7.8:1, when gold soared to nearly $1,900 per - avoid gold.

What to do? I often don't follow my own advice. I'm a walking, talking text book on BE.

I'm not really a gold bug (I like silver better) actually and that slice of my portfolio is far less a % overall than yours. The point I was trying to make was valuation as tied to abstraction vs. valuation as tied to physical reality over extremely large periods of time (i.e. gold buys almost as most value today as it did thousands of years ago...i.e. earning its 'safe haven' status).

I love abstraction. The idea of 'promisory currency' has made human existence much much better and myself much wealthier. But I don't ignore the idea that 'promisory' means 'promise' and that more frequently than people would like to acknowledge said note come due.

I wish there was something digitally solid that still maintains all the valuable aspects of a currency even when the power goes off. There isn't.

They call fiat currency/paper, "money" and "assets." They are IOU's and, as such, liabilities, with no collateral (gold, silver, or even UST bonds) backing or maturity date.

True. At the moment silver is very cheap compared to gold.

Silver is another symptom of my behavioral economics problem. I own little silver. One, the premium for silver bullion coins (I prefer) is higher. Two, it's both a commodity and a financial asset. I need to think about buying more silver.

Somebody smarter than me wrote, "You cannot store wealth in paper." It can be devalued/inflated at will.

The idea is to own real productive assets (companies, real estate) that produce earnings, not lumps of inert metal that do not. But what do I know about making money?

Metals are productive assets used in many things. Use the Wikipedia page for each metal to find uses.

Somebody smarter than me wrote, "You cannot store wealth in paper." It can be devalued/inflated at will

Except no one does. Storing wealth 'in paper' in this context would be stuffing $100 bills under your mattress. Some people, I'm sure, do things like that but for most the $100 bill, if they ever touch it, is only a short term house guest who is swapped for stock, bonds, or other financial instruments.

Another way of looking at it: Every era’s monetary and financial institutions are born with the seeds of their own eventual doom, because they incorporate unworkable and unsustainable elements at their very core. Everyone goes along with it for a while, then they notice the gorilla in the room and the wheels come off and we lurch into the next era. A stable equilibrium is not possible even in principle.

Another way to look at this--and the evidence backs this up--is that both short term and long term, money is neutral, meaning monetarism largely has no real effects. So whatever central banks do or don't do, outside of maybe hyperinflation (which arguably is due to external events like war), doesn't matter.

You really are a fucking retard.

One might say that Janet Shelton wishes to go back to the future. The fear of returning to the gold standard is deflation. The fear of floating exchange rates is inflation. [Inflation in this context concerns asset prices.] Ms. Shelton wises to return to the gold standard to support stability (avoid instability), while cutting interest rates to support inflation (avoid deflation). Imaginable or unimaginable?

I love you, man.

Before 1933 and FDR's unconstitutional (coinage is the authority of Congress) and notorious gold money confiscation executive order, US money was gold. It was the gold standard on steroids. FR Notes were redeemable in gold coins. This was embossed on the notes, "Pay to Bearer . . ."

Since 1971 when Dick Nixon closed the gold window, the US has been on fiat currency. It's been an interesting ride.

The fear of the gold standard is that it severely limits economic engineering and management by central bankers. Fed Blind-sided Again. No one understands what caused the Great Depression and its deflation, else America not have had a repeat, much less dozens.

Anyhow, I'm pretty sure the GD was not caused by gold money or the gold standard.

Simply put, in 1944 the Bretton Woods thingy was signed. It went into effect in 1946 with the USA committed to redeem US$'s for $35 per ounce worth of gold.

Bretton Woods was doomed, like most central banking/planning schemes, from day-one. Some one around MR should be able to explain that.

No one listens to me.

The 'Straussian' reading of this is all about crypto, right?

Bingo! I was thinking specifically about the proposed Libra currency ...

Or Tyler is leaning towards the MMT camp. Perhaps he is looking to move to St Louis.

>Yet the Bretton Woods arrangements had a wonderful track record, as the 1950s and 1960s generated strong economic growth

That's a bit strong. Bretton Woods could have been a net negative, just overshadowed by other effects.

You're right of course. The strong economic growth was fueled by war technology and production capacity, Blacks and women entering the labor force, destruction of several totalitarian states, rebuilding of capital.

This growth happened despite BW, not because of it.

1930-50 was almost two decades of economic catastrophe followed by all out war resulting in huge pent up demand for just about everything...the economic boom from 1950-70 would have happened regardless of financial system in place...it was a great time to be young and free

"1930-50 was almost two decades of economic catastrophe followed by all out war resulting in huge pent up demand for just about everything...the economic boom from 1950-70 would have happened regardless of financial system in place...it was a great time to be young and free"

Errr no. 'Pent up demand' doesn't count for anything if the economy cannot make the goods and services demand wants. Post-1950 was amazing because the US economy turned from making bullets and tanks to TV dinners and cars almost on a dime. Two sides of the equation have to work....don't believe me compare USSR 1980 to USA 1980. Where did 'pent up demand' get satisfied the most?

Also how exactly is demand 'pent up'? It was 'pent up' in and via the financial system. US citizens who had to take their pay and put it into war bonds because rationing meant they couldn't buy new cars, had to have a financial system that would then assist them in withdrawing their wartime savings and turn it into purchasing.

I wonder if it is a rite of passage for econ grad students who are in New England to at some point visit Mt. Washington in New Hampshire, and quite possibly ride the cog railroad to the summit. And if you are in the vicinity of Mt. Washington, you can't help but notice that Bretton Woods (the area, presumably the woods, and the resort all sharing the same name) is right there and if you're an economist how can you resist taking a look at the site of the eponymous conference? And sure enough the Mt. Washington Hotel has commemorated the room where the meetings were with a historic plaque, I don't know if it's still used as a conference room.

So as you consider the legacy of Bretton Woods this week, remember that core lesson: There will be major changes in monetary and institutional arrangements that no one can even imagine right now. Assume the permanency of the status quo at your peril.
We have monetary regime changes all the time, 100% of the time, every generation. Each new monetary regime includes the new generation not paying for old government debt that was accumulated before they even voted.

This fact is not some hidden reference to libra, it is a 100% true historical fact, written about by many authors. The peril is a bunch of economists claiming that the latest monetary regime, Nixon Shock, will last forever. But the same economists have been showing up at each regime change, claiming the 'This time is different..' motto.

We will be lucky to survive the next collapse. The Fed's balance sheet is so large and filled with garbage, the slightest headwind will cause a collapse.

At the same time, this was the result of a secular effort to "economize" gold reserves after war inflation rather than deflating the money supply. It started at least as early as 1922 at the Genoa conference. Using certain strong currencies as reserves in addition to gold even predated Genoa and started as early as the late 19th century. And the emergence of the dollar as a reserve Currency had started before WWII, too. The Bretton Woods monetary arrangement borrowed much from these earlier moves. It was by no means incredibly creative.

Yes. For someone supposedly as well-read as Tyler, he seems to have never heard of the inter-war gold exchange standard.

"today’s arrangements of fiat currencies and (mostly) floating rates were unimaginable"

Except that fiat money is an illusion. People see that the dollar is inconvertible, and they conclude that it is unbacked. The fact is that the dollar is backed by the issuer's assets, just like any other financial security. If modern paper currencies were really unbacked, then why do all central banks hold assets?

You can own a house and borrow money without using the house as collateral. Central banks do the same thing.

But there always has to be collateral of some kind. If it's not a house, it's a lien on your future wages. Central banks issue currency and receive mostly bonds in exchange, but they never issue money for nothing

I don't get this phrase 'backed by'. Currency itself is backed by nothing but no one holds currency. If you have $1000 you are either going to spend it or you will save it. If you save it you are purchasing some financial asset such as a deposit in a bank account, a bond, a stock, a loan to your buddy etc.

Your financial asset is 'backed by' things. The assets of the bank and the FDIC's guarantee of deposits, the credit worthiness of whoever's bond you brought, the prospects of the company whose stock you brought, how good your buddy is on paying things back.

The currency itself is backed by nothing but itself. Then again except for some eccentric people, no one saves huge amounts of currency. You may keep $1000 at home just in case but for most people $1000 is just means to some end.

Federal reserve notes are backed by the Fed's assets, just as stocks and bonds issued by GM are backed by GM's assets. FRN's used to be both backed and convertible (into gold). Then gold convertibility was suspended and the FRN's became backed but inconvertible (analogous to an American call option switching to a European call option). People wrongly think that inconvertible=unbacked, and the myth of fiat money is born.

But what exactly do you mean by 'backed'? If you mean you have the right to go take GM's assets or the Feds, well no. In the case of GM it depends. Most bonds do let you claim the firm's assets (in line with other creditors). Some bonds limit the assets at risk. Stock, of course, gives you no legal right to take the firm's assets unless you hold enough shares to control the company or get other shareholders to go along with you and liquidate it.

If by 'backed' you mean the $1 you have in your pocket got there because the Fed purchased something of $1 of value (like a treasury bond), then yes. But this doesn't really resonate to me.

If you have a garage sale and your neighbor spends $1 to buy a teacup and then goes home and smashes the teacup, the $1 you have in your pocket is NOT 'backed' by the old teacup in your neighbor's house anymore. The Fed, in theory, could set all the bonds it brought on fire.

On the other hand GM cannot just throw away it's assets without lawyers for their bond holders immediately filing for an injunction.

Suppose a bank receives 100 oz of silver on deposit, and issues 100 paper receipts (dollars) in exchange. We are all clear that the $100 is backed by and convertible into the 100 oz. But then what if the bank gets robbed? What if the bank is closed nights and weekends? I expect you will still agree that the dollars are backed by the silver. But what if no customers ever come in to withdraw the silver, and what if this goes on for centuries? (As actually happened with the old Bank of Amsterdam) And what if the bank, recognizing this, announces that it will only ever hand out silver if and when the bank shuts down? I say that the dollars are still backed, but I wonder if you would. Or how about the Bank of England's 24-year suspension of 1797-1821. Did the pound suddenly become fiat money in 1797, only to change back to backed money in 1821? My answer is that the pound was backed all along, and only the conditions of convertibility changed.

Convertibility can be instant or delayed, free or costly, certain or uncertain,at the customer's option or a the bank's option, real or nominal, etc. Dollars can reflux to the bank in exchange for gold, for bonds, for loan repayments, for real estate, etc. In every case, I say the dollar is backed by the bank's miscellaneous assets. In which cases would you say that it is unbacked? Do you know of any bank that holds no assets against the money it issues? I don't.

Convertibility was about capping money supply creation, not so much about going back and forth between cash and gold. If the bank was robbed of the gold after you put it in and they gave you paper, no big deal until the robbers show up at the bank the next day and get more dollars for gold now doubling the money supply. Convertibility just creates a check on this because paper holders can create a run on the bank by cashing out gold all at once.

Same thing happens when a central bank wants to peg their currency to some other and investors start to doubt the bank can tolerate the price of maintaining the peg.

It's not about the quantity of money created, but about the amount of backing per unit of money. A bank might hold 100 oz against $100 issued, or 200 oz against $200 issued, or various assets worth 300 oz against $300 issued, and in every case, $1=1 oz. This is true of stocks, bonds, and all other financial securities, including money. The way that any bank maintains any peg is to have enough assets to be able to buy back , at par value, all the money it issued.

If what you say were true, then why would any central bank bother to hold assets?

Negative interest rates.

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