Bretton Woods (Part Deux)

The sequel is never as good as the original.

The ‘New Bretton Woods’ chatter has increased in recent days. Yesterday, ECB President Jean-Claude Trichet said, “Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline. It’s absolutely clear that the financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline.”

In 1933, FDR signed into law Presidential Executive Order 6102, also known as the Gold Confiscation Act, which made illegal the private ownership of gold. Under threat of fine and imprisonment, U.S. citizens were forced to sell their gold to the Federal Reserve at a government set price of $20.67 per ounce. Shortly thereafter, the U.S. Treasury set the price of gold for international settlements at $35 per ounce, thereby devaluing the dollar by 40% overnight (or inflating the value of the gold you were just forced to sell by 75%, depending on how you want to look at it). I’d guess that every single person who gave up their gold at a steep discount was unhappy, but maybe not, maybe it was seen as patriotic.

Eleven years later in 1944, at the Mount Washington Hotel in Bretton Woods, New Hampshire, the WWII Allied leaders met and agreed to a monetary policy that set each country’s currency to a fixed exchange rate +/- 1% in terms of gold.

After WWII the U.S. economy was stronger than any other in the world, and that economic strength translated into currency strength. The U.S. Treasury made a commitment to convert dollars into gold at the set exchange rate of 35 to 1. Hand over $35 and you’d receive one ounce of gold in return. The U.S. dollar was as good as gold. In fact, it was better. It was much easier to transport and it earned interest. What a deal.

The system collapsed in 1971 when, without consulting with foreign leaders or even his own State Department, Richard Nixon suspended the U.S. dollars’ convertibility to gold. In what would later be called the “Nixon Shock”, the gold standard for foreign exchange was gone.
So, the U.S. dollar and the world monetary system as we know it are only 37 years old.

Today, Italian Economic Minister Giulio Tremonti said, “The dollar is the currency of Bretton Woods, but now it could be that there will be other combinations.”

The United States is up to its throat in debt, and I assume that our creditors would like to be paid back in something other than a debased dollar.

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In a wild display of volatility not seen since, er.. yesterday, the Dow swung in a 759 point range, or almost 9%. In less than an hour and a half of trading, the index was down 357 points then came roaring back to close up 401 to 8,979. The volatility was attributed to options expiration, the wanning gibbous moon, donkeys, wildfires in California and Citadel's CEO Ken Griffin.