Thread by @buchmanster

Lot of folks commemorating the 50th anniversary of the Nixon Shock today as the death of Bretton Woods (#wtfhappenedin1971). While indeed it was the formal announcement of the death of that regime, in practice Bretton Woods had failed much sooner. A short thread 🧵

Arguably the Bretton Woods regime was doomed to fail from the start. It was much inferior to the Bancor proposal from Keynes and Schumacher for a supranational unit of account to facilitate multilateral clearing. But it won out due to American political might

In the first years after the war, the Fed was subservient to the Treasury. But in the 1951 Treasury-Fed accord, the Fed won its independence back, and laid the foundation for the open market operations that would define monetary policy for decades to come.

While the Fed was flexing its newfound monetary muscle domestically, a strange thing was starting to happen off shore: the birth of the Eurodollar. The Fed seems to have largely ignored or misunderstood this development, to its peril.

The creation of dollars outside control of the Fed was a sure sign of something wrong. By early 60s, there were too many dollars to maintain gold convertibility - the USD/gold rate was under attack! So a group of countries fought back by establishing the London Gold Pool in 1961.

The LGP was a tacit signal that Bretton Woods was failing. US gold reserves were insufficient to back the global supply of dollars - the reserves of other countries were needed to secure the $35/oz exchange rate. Meanwhile, dollar supply continued to expand to fund Vietnam War

By 1967, France, already disgusted with what they called America's exorbitant privilege, called bullshit on the whole affair, withdrew from the pool, and repatriated their gold to Paris. The London Gold Pool collapsed formally in 1968.

By the summer of 1971, countries like Switzerland and France were trying to redeem as many dollars as they could for gold. The Bretton Woods system was finished. On August 15, 1971, exactly 50 years ago today, Nixon pronounced it dead

Naturally, the convertibility of dollars into gold was only supposed to be suspended "temporarily". But of course, no one would ever trade $35 for an ounce of gold again.

One might summarize the subsequent 50 years of monetary policy as follows:

https://twitter.com/buchmanster/status/1366427650407948291

So there are many points when one could say Bretton Woods failed. Whether from the start with rejection of Bancor, or with the Treasury-Fed accord in '51, or with the birth of the Eurodollar in late '50s, or with the start of the London Gold Pool in '61, or its collapse in '68

The challenge of the regime came to be defined as the Triffin Dilemma - the conflict of interest faced by supplier of the world reserve currency between domestic and foreign policy. In order to supply the world with dollars, the US would have to run a permanent trade deficit.

Most importantly, we must remember that monetary regimes are not forever. Our current regime has innumerable signs of failure as well, and a monetary revolution may be a foot. Crypto tech gives us new tools to formulate a more sustainable monetary order:

https://twitter.com/buchmanster/status/1330600004419989518

I've surely simplified a lot here, and still learning the history myself. For ppl much more knowledgable on the history of the Fed, follow/listen/read @GeorgeSelgin @PMehrling @ummodern @JeffSnider_AIP. Snider and @EmilKalinowski's Making Sense podcast is especially good!