What Really Went Wrong with the Nixon Shock? (Updated)

[MachineGhost]

The modern currency float has its problems. There is no magical monetary cure, monetary policy is a policy area almost uniquely crowded with trade-offs and lesser evils.

If you want a classical gold standard, you get chronic deflation punctuated by depressions, as the U.S. did between 1873 and 1934.

If you want a regime of managed currencies tethered to gold, you get regulations and controls, as the U.S. got from 1934 through 1971.

If you let the currency float, you get chronic inflation punctuated by bubbles, the American lot since 1971.

System 1 is incompatible with democracy, because voters won’t accept the pain inherent in a gold standard.

System 2 is incompatible with the free market economics I favor.

That leaves me with System 3 as the worst option except for all the others.

http://www.frumforum.com/what-really-we ... xon-shock/

[Pointedstick]

The argument against system 1 seems contrived; any imperfect system will hurt. With system 3, for example, why should the pain of financial-sector-driven recessions and chronic inflation be any more palatable to or compatible with the voting public? I don't see how a recession-prone deflationary gold standard system should hurt any more than a recession-prone heavily-financialized inflationary bubble-driven system.

Also system 2 still had plenty of inflation. From http://www.westegg.com/inflation/:

What cost $1000 in 1934 would cost $3026.66 in 1971.
Also, if you were to buy exactly the same products in 1971 and 1934,
they would cost you $1000 and $333.27 respectively.

Prices tripling over in 36 years ain't exactly my idea of a stable currency, despite all those regulations.

[Ad Orientem]

There are practical arguments against a return to the pre-World War gold standard that are weighty. But the constant bleating about deflationary depressions is not among them.

The so called depression of the 1870's was at most a mild recession and there is a lot of evidence pointing to modest economic growth in all but 2 of those years. The 1880's were highly deflationary... and also among the most prosperous in the history of the country. The panic of 1892-93 and the resulting brief but nasty recession was not produced by the gold standard. It was caused by the US Government's decision under the Harrison Administration to drastically expand the minting of silver coins and other steps that diluted the US commitment to gold. This panicked investors who, justifiably, suspected that the US was less than firmly committed to redeeming its obligations in gold. The result was a mad rush by foreign bond holders to cash in their bonds and gold certificates (the paper money of the era) and move the specie out of the United States. This nearly bankrupted the Treasury which was saved only when J.P. Morgan intervened with a consortium of wealthy men who lent the US Treasury $25 million in specie and arrested the gold panic.

[AgAuMoney]

Agree that the arguments against the gold standard were contrived.

But my question is, if you don't want a centrally planned economy, why would you want the fundamental underpinning of the entire economic system to be centrally planned?

The economic problems of depression, inflation, bubbles and crashes have lasted a lot longer and cut a lot deeper since the Federal Reserve has been planning our economy.

[AgAuMoney]

But my question is, if you don't want a centrally planned economy, why would you want the fundamental underpinning of the entire economic system to be centrally planned?

... To get stability, the central bank can assume the slack instead, thereby turning it into a fixed exchange rate.

Fixed exchange rates aren't that great either.  Because there's a limit to the central bank's asset base, speculative attacks can occur ...

Like I said, why would you want a centrally planned economy?

The central bank is the clear and present danger that scares me the most.  This iteration of the U.S. central bank should be eliminated just like the previous.

[AgAuMoney]

Long distance trade becomes haphazard with long bouts of liquidity crises as independent banks ...

This sounds just like the poor communists, "but who will decide how much bread to make?"

And is equally frightening.