Businessweek on Nixon's dollar shock.

At Bloomberg Businessweek, Roger Lowenstein provides an excellent – and surprising, coming from the mainstream media – report on the breakdown of the Bretton-Woods gold-linked dollar, including laying blame on monetarists Milton Friedman and George Shultz, and linking today's economic problems to the floating dollar.

From his 1999 Nobel Prize lecture, Robert Mundell explains the circumstances that led to the demise of Bretton-Woods and the Great Inflation of the 1970s:

The adoption of my policy mix [by JFK after 1962] helped the United States to achieve rapid growth with stability. It was not intended to and could not solve the basic problem of the international monetary system, which stemmed from the undervaluation of gold. Nevertheless the problem of the U.S. balance- of- payments was intricately tied up with the problem of the system. With very little excess gold coming into the stocks of central banks from the private market, and the US dollar the only alternative component of reserves, the U.S. deficit was the principal means by which the rest of the world was supplied with additional reserves. If the United States failed to correct its balance of payments deficit, it would no longer be able to maintain gold convertibility; on the other hand, if it corrected its deficit, the rest of the world would run short of reserves and bring on slower growth or, worse, deflation. The last scenario hinted at a repetition of the problem of the interwar period.

Two basic solutions were consistent with preserving the system. One solution was to raise the price of gold. The founding fathers of the IMF had put a provision in the IMF Articles of Agreement for dealing with a gold scarcity or surplus: a change in the par values of all currencies, which would have changed the price of gold in terms of all currencies and left exchange rates unchanged. In the 1968 election campaign, candidate Richard M. Nixon chose Arthur Burns as his emissary on a secret mission to sound out European opinion on an increase in the price of gold. It turned out to be favorable and Burns recommended prompt action immediately after the election. Nothing, however, came of it.

The other option was to create a substitute for gold. This course was in fact adopted. In the late summer of 1967, international agreement was reached on an amendment to the IMF articles to allow the creation of Special Drawing Rights (SDRs), gold-guaranteed bookkeeping reserves made available through the IMF, with a unit value equal to one gold dollar, or 1/35 of an ounce. Somewhat less than SDR 10 billion were allocated to member countries in 1970, 1971 and 1972, but they proved to be inadequate—too little and too late--to meet the main problems of the system.

On August 15, 1971, confronted by requests for conversion of dollars into gold by the United Kingdom and other countries, President Nixon took the dollar off gold, closing the "gold window" at which dollars were exchanged for gold with foreign central banks. The other countries now took their currencies off the dollar and a period of floating began.

But floating made the embryonic plans just forming for European monetary integration more difficult, and in December 1971, at a meeting at the Smithsonian Institution in Washington, D. C., finance ministers agreed on a restoration of the fixed exchange rate system without gold convertibility. A few exchange rates were changed and the official dollar price of gold was raised but the act was almost purely nominal since the United States was no longer committed to buying or selling gold.

The world thus moved onto a pure dollar standard, in which the major countries fixed their currencies to the dollar without a reciprocal obligation with respect to gold convertibility on the part of the United States. But U.S. monetary policy was too expansionary in the following years and, after another ineffective devaluation of the dollar, the system was allowed to break up into generalized floating in the spring of 1973. Thus ended the dollar standard….

With the breakdown of the system, money supplies became more elastic, accommodating not only inflationary wage developments but also the monopolistic pricing of internationally traded commodities. Each time the price of oil was raised in the 1970's, the Eurodollar market expanded to finance the deficits of oil-importing countries; from deposits of $223 billion 1971 they would explode to $2,351 billion in 1982(International Monetary Fund, IMF International Statistic Yearbook, 1988 p. 68).

Inflation in the United States had now become a major problem. It had taken twenty years, from 1952 to 1971, for U.S. wholesale prices to rise by less than 30 percent. But after 1971, it took only eleven years for U.S. prices to rise by 157 percent! This mainly peacetime inflation was greater than the war-related inflations from World War II (108 percent over 1939-48), World War I (121 percent over 1913-1920), the Civil War (118 percent over 1861-1864) or the War of 1812 (44 percent over 1811-1814). The greatest inflation in U.S. history since the War of Independence took place after the United States left gold in the decade after 1971.

Monday round up.

On The Daily Reckoning, Nathan Lewis notes that wheat is cheap in real terms but expensive due to the low dollar.

At New World Economics, Lewis explains the British gold standard from 1778-1844.

On the Kudlow Report, Stephen Moore debates the President’s plan for big new spending:



In Forbes, John Tamny relieves Nixon Fed Chairman Arthur Burns of responsibility for that era’s dollar devaluation.

On Bloomberg, Kevin Hassett suggests a shift to a consumption-based tax system.

The NY Sun editorializes that if President Obama wants to imitate JFK, he should eschew targeted tax breaks in favor of lower tax rates:



In The Houston Chronicle, Houston branch Federal Reserve Bank Paul Hobby opposes efforts to investigate the Fed saying, “No one who studies the global economic issues today would forfeit this nation's ability to conduct monetary policy through a central bank.”

At The Washington Examiner, Robert Patterson (a friend) cites former Kemp-staffer John Mueller’s argument that lower birth rates have damaged the economy.

Weekend items.

On DNA India, Robert Mundell offers a must-read overview on the dollar, euro, yuan and gold.

Another must-read comes from Asia Times, where Hossein Askari and Noureddine Krichene provide a fascinating explanation of the global currency situation. (Hat tip: Ralph Benko.)

At RCM, Larry Kudlow wonders whether the administration’s new jobs czar, GE CEO Jeffrey Immelt, can convince the president to cut corporate taxes.

On The Kudlow Report, Don Luskin discusses roadblocks facing the economy:



Echoing Mundell, at Forbes Reuven Brenner argues for reform of corporate taxes.

Business Week reports conservative Keynesian John Taylor is the House GOP’s leading advisor on Federal Reserve policy.

Mediaite posts video of this weekend’s Real Time with Bill Maher where Stephen Moore, Rachel Maddow and David Stockman debate Reaganomics:



On Bloomberg, Caroline Baum notes the U.S. is exporting inflation to China.

At The WSJ, Stephen Green analyzes the numerous challenges facing China’s economy.

In The NY Sun, Seth Lipsky calls Sen. Joe Lieberman (CT) a Kennedy liberal, though he notes Lieberman’s lack of focus on sound money.

AEI reports on historical budget consolidations that the U.S. can emulate.

Dshort breaks down the consumer price index.

Wednesday round up.

On Forbes, Brian Domitrovic likens President Obama’s tax cut shift to JFK’s shift in 1961 away from his Keynesian advisors.

At Human Events, Art Laffer recommends voting for the tax deal, saying liberal focus on class warfare will cost Democrats votes while stimulating their “anti-social retinue of freaks and weirdos.” (Stet.)

On The Kudlow Report, James Pethokoukis discusses the President’s pro-business shift:




At The American Spectator, Jeffrey Lord remembers Jack Kemp’s final advice to Barack Obama.

From last month on Forbes, Reuven Brenner suggests a gold-backed currency will restore investor trust in the economy. Part II is here.

On CNBC’s NetNet, Steve Forbes argues the tax deal is as good as Republicans are going to get.

At Alhambra Investments, Joseph Calhoun outlines the need for more pro-growth policies:

It just so happens too that a shift to better economic policy in the US is exactly what the world economy needs right now. Despite the prevailing, overwhelmingly bullish sentiment regarding stocks, commodities and future economic growth, there are a still a lot of potential problems that could derail the rosy view of the world. Europe’s sovereign debt problems - which are really European bank debt problems - have not yet been resolved but the road to recovery could be eased in the short term by a lower value for the Euro. Better US economic policy may speed that process if it means capital flows back to the US. The developing world’s emerging inflation problem would also be eased by a reversal of the hot money flows that are at the root of the problem. Capital and price controls as are being tried - along with some fairly aggressive monetary tactics - in China and other emerging markets are crude tools that are bound to fail unless a more favorable investment environment is crafted in the developed world. Better economic policy here that reduces capital inflows to China, Brazil and other emerging markets not only eases trade frictions but will reduce inflation there while increasing investment here. It is bad US economic policies that are causing many of the world’s economic imbalances not currency manipulation in Asia. Better US economic policy is the only proper remedy.

But the just announced deal on the Bush tax rates is not nearly enough to attract capital back into productive investments. The relative changes in exchange rates between fiat currencies are not the important metric to watch. We will know that policy has truly changed for the better when the price of gold and other commodities fall and then stabilize at lower levels. You want stimulus? What would be the effect on US growth if oil dropped by 50%? Or copper? Or any of a number of other commodities? What if all that capital tied up in gold were to flow into productive investments?

At The Pittsburgh Tribune-Review, Don Boudreaux rebuts trade deficit phobia.

On Bloomberg, Caroline Baum speculates that the left’s opposition to low tax rates stems from a zero-sum worldview.

At NRO, economist Scott Sumner maligns gold-based money in favor of GDP targeting.

From Vlad Signorelli, Bretton Woods Research comments on Richard Holbrooke’s death:

Holbrooke, Afghanistan & the Economy

[According to the surgeon who last spoke with the late, longtime U.S. diplomat Richard Holbrooke, Holbrooke`s last words were, "You`ve got to stop this war in Afghanistan." Certainly, the loss of Obama`s top civilian official dealing with the AF-Pak situation only adds to the looming crisis. Only yesterday, the Washington Post quoted Afghan President Hamid Karzai as saying, "If I had to choose sides today, I`d choose the Taliban."

Yet, while the spotlight is on the Obama Administration and how it will fill the hole left by Holbrooke, the enormous costs of our continued involvement in Afghanistan are passing by with barely a mention in the mainstream press or political establishment. Richard Vague, a Republican and CEO of Energy Plus, points out in a recent oped below that the Administration currently spends $119 billion per year on Afghanistan, whose gross national product is only $14 billion per year. Given such astounding proportions, it may be only a matter of time before the GOP`s fiscal conservatives break their virtual silence on AF-Pak expenditures and excite a national debate next year on the amount of blood and treasure risked during recessionary times. We suspect that some of these anti-Afghanistan fiscal conservatives will emerge from the new Tea Party contingency in Congress. BWR]

Article here.

Thursday items.

On RCM, Charles Kadlec explains that higher tax rates on the rich are equivalent to domestic tariffs on doing business with high-income individuals and small businesses.

The NY Sun editorializes on the history of JFK, Nixon and gold.

On The Kudlow Report, Larry discusses the weak dollar’s impact on the oil price:



In Foreign Policy, Keynesian Barry Eichengreen analyzes the present currency war.

From 2004, Jude Wanniski and Eichengreen correspond on currency and gold.

Larry Kudlow wonders if this week’s Gallup poll led to the market rally.

At WSJ video, Stephen Moore examines job losses:



At The Journal, Tadashi Nakamae suggests the U.S. is repeating Japan’s monetary errors.

From 2009, Alan Reynolds debunks Keynesian analysis of Japan’s deflation.

On CNBC’s Netnet, Ash Bennington analyzes Art Laffer’s recent WSJ piece.

At Intermex Financial, Ricardo Valuenzuela posts a 2005 Wanniski book review on American entrepreneurship in Jude’s memory.

Reich's flawed history.

In a recent column advocating higher tax rates on the wealthy, Keynesian former Labor Secretary Robert Reich wrote:

Unfortunately for supply-siders, history has proven them wrong again and again. During almost three decades spanning 1951 to 1980, when America's top marginal tax rate was between 70 and 92 percent, the nation's average annual growth was 3.7 percent. But between 1983 and start of the Great Recession, when the top rate was far lower -- ranging between 35 and 39 percent -- the economy grew an average of just 3 percent per year. Supply-siders are fond of claiming that Ronald Reagan's 1981 cuts caused the 1980s economic boom. In fact, that boom followed Reagan's 1982 tax increase. The 1990s boom likewise was not the result of a tax cut; it came in the wake of Bill Clinton's 1993 tax increase.

A few points in response.

First, and most crucially, the post-war period before 1971 was blessed with a generally well-maintained dollar exchange rate versus gold, and a global system of fixed exchange rates among major currencies. This meant stable prices, low interest rates, and international trade unencumbered by currency fluctuation. This arrangement, the equivalent of a single world currency, was a huge benefit across the globe, freeing the U.S. to export heavily to rebuilding nations such as Japan and Germany. These nations, it should be noted, grew rapidly due to sound money and their own deep tax rate cuts.

Second, the highest U.S. tax rates applied to relatively few earners, and loopholes were plentiful for top earners.

Third, the 1950s were less than prosperous, as taxes and inflation crept up. According to Brian Domitrovic's Econoclasts, that decade had no less than three recessions.

Fourth, the 1960s were boom years, thanks to JFK's public re-commitment to a stable dollar/gold price and a major tax rate cut.

And fifth, the real growth of the economy during the 1970s was a paltry 1.8 percent, with the Dow losing ground in real terms and inflation rising due to President Nixon's decision to float the dollar. Significant growth between 1971-1982 can only be found in nominal, i.e. inflationary, terms.

Regarding the Reagan Boom, Reich is also off base. The 1981 Reagan tax cuts were phased in, taking full effect in 1983, so their impact was delayed.

More importantly, from 1981-82, the U.S. was in a nasty deflation as President Reagan's strong dollar rhetoric, combined with Fed Chairman Paul Volcker's tight money policy, caused the greenback's value to surge. Gold fell from a record $850 in 1980 to $300 two years later, oil plunged, and dollar debtors were crushed.

When Volcker was forced by a pending Mexican debt default to add liquidity to the cash-starved economy in summer 1982, the dollar fell, gold jumped, and the Reagan Boom took off. The Dow and bond markets surged, GDP rose, interest rates declined, and economic health was restored. Reagan's relatively minor 1982 tax increase -- though a mistake -- was not enough to diminish the positive impact of newly sound money and large marginal tax rate cuts. The boom was extended by 1986's additional tax rate cuts, though that year's capital gains tax increase was unhelpful.

Finally, President Clinton's 1993 income tax increase occurred more than a year into an economic expansion, and the post-recession growth rate was sub-standard as a result. Supply-side initiatives such as 1994's NAFTA helped improve growth, as did Clinton's willingness to maintain a sound dollar. But the real economic surge of the Clinton years started in 1996, as markets got wind of a major capital gains tax cut to come. In response, investment soared, the markets boomed, and revenues flooded into the treasury.

Tuesday items.

Bloomberg columnist Amity Schlaes suggests George Soros's advice to Germany will weaken the euro.

At National Review, Raymond J. Keating is enthusiastic about supply-sider David Malpass's candidacy.

On The Kudlow Report, Steve Forbes points out that deficits from tax rate cuts are positive while deficits from higher spending are negative.

From the archives, President Kennedy argues for tax rate cuts to increase growth and balance the budget.

Austrian economist Peter Schiff believes spending cuts stimulate supply, which is key to recovery.

At Barrons, Randall W. Forsyth argues low interest rates point to deflation.

Goodbye Supply Side author Kevin D. Williamson calls on Republicans to itemize the spending they will cut.