In hindsight, several particular decisions made in the 20th century created an environment that necessitated bitcoin.
This is an opinion editorial by Wilbrrr Wrong, Bitcoin pleb and economic history enthusiast.
In reading about this time period, it’s hard to escape the conclusion that Bretton Woods was a system of control that was predestined to fail due to an inherently poor incentive structure. The rules of Bretton Woods often required politicians and governments to act against their own interests, and impose economic pain on their own people in favor of other nations and international stability. As this system’s tensions came to a head in 1971, peoples’ lives and businesses became subject to the vagaries and competitions of international power politics.
Bitcoin presents a compelling alternative system in which the selfish incentives of actors strengthen the network and monetary policy is known by all. This certainty allows for long-term planning and stability, especially as power politics and questionable government policies continue in the current day.
For all the valid criticisms that are leveled against the Bretton Woods system, it did provide stability in the aftermath of World War II. The U.S. pledge to convert dollars for gold provided confidence for the world to rebuild after the devastation of 1939-1945. During this period American business and technology reigned supreme.
Added into the mix was fiscal profligacy from the federal government. Deficits were driven by the expansive social programs of the 1960s, but also by the U.S. role as military protector of the West. Along with the Vietnam War, America also bore the expense of its troops stationed in Europe.
Taken together, the U.S. of 1971 was being shaken from its long period of unquestioned economic prosperity and facing the real rising issues of inflation and unemployment. Nixon held a strong belief that his previous loss in the 1960 presidential election was due to a badly timed recession, so he was highly motivated to keep the economy and jobs growing leading up to 1972.
Policy discussions in the summer of 1971 featured four key players:
Nixon was born to a poor family in California and worked his way to Duke University through a combination of grit and ambition. He started his political career by unseating a three-time incumbent in the House of Representatives and made a fast impression as an effective soldier in pushing Republican legislative priorities.
This diplomatic coup was announced on July 15, 1971, exactly one month before he closed the gold window.
Nixon’s main interests were in geopolitical strategy and the Cold War. When it came to economics, his primary concern was his fundamental belief that recessions are what causes politicians to be voted out. Garten explains in his book that Nixon’s biographer wrote, “Nixon repeatedly interrupted Cabinet meetings to go over the history of Republican defeats when the economy was in slow growth or decline.”
Connally, a Democrat, was former governor of Texas. He was a charismatic and ruthless politician. He was nominated by Nixon at the start of 1971 to shake up his economic team and create allies in Congress.
Connally did not have a finance background, but he was a quick study and would come to rely on Paul Volcker to back him up on the details. His large personality would give him outsized influence leading up to August 1971 and he would aggressively lead political and international negotiations following Nixon’s announcement.
Arthur Burns is remembered as the Fed chairman who failed to contain the inflation of the 1970s, but in 1971, he was one of the most respected economists in the nation, with experience across academia and government and he had many relationships with business leaders.
Burns came to the White House in 1968 as Nixon’s economic counselor and one of his most trusted confidants. In appointing Burns as Fed chairman in 1970, Nixon’s goal was to have an ally who would keep the economy strong, and bluntly, do what the administration told him to do. Nixon made many private remarks disparaging the “supposed” independence of the Fed.
The former allies would come into almost immediate conflict. Nixon strongly preferred lower interest rates and an increase in the money supply. Burns wanted to defend the dollar and refused to budge on interest rates.
Another point of contention was wage and price controls. Congress had recently passed a bill to give the president legal authority for these controls, however they went strongly against Nixon’s free-market philosophy. Burns angered Nixon with repeated speeches advocating for the extensive use of wage and price controls to keep inflation in check.
As the Camp David weekend approached in 1971, Nixon’s team realized they had to bring Burns on board with the administration’s new economic package. Closing the gold window was a dramatic new direction, and Fed opposition would fundamentally undermine the initiative.
Paul Volcker was relatively unknown in 1971, however over the following decades he would come to be known as one of America’s most trusted public servants. He cultivated allies across Congress and several presidential administrations through honest discussions, unimpeachable integrity and deep knowledge of the monetary system. Volcker and Connally would establish a close working relationship, despite disagreement on several issues.
“Price stability belongs to the social contract. We give government the right to print money because we trust elected officials not to abuse that right, not to debase that currency by inflating. Foreigners hold our dollars because they trust our pledge that these dollars are equivalent to gold. And trust is everything.”
This is a high-minded sentiment, and it reflected Volcker’s personality well. However, Satoshi clearly believed that public officials would always break that trust eventually, since their incentives are often skewed heavily toward debasement. Certainly Nixon had a marked skew toward money printing.
As early as 1969, Volcker made presentations to Nixon and others on potential modifications of Bretton Woods. Volcker put together a report which described four options. This report would shape the broad outlines of policy discussions leading up to August 1971.
Option 1: Unmodified Bretton Woods
This was presented for completeness’ sake, however it was not seriously considered. Tensions were rising, and officials could see a crisis on the horizon.
A simple reason for this option’s lack of feasibility was that the U.S. did not have the gold to pay for all dollars outstanding. U.S. gold holdings were $11.2 billion, but foreigners held $40 billion. At any moment there could be a run on gold.
Option 2: Modified Bretton Woods
Favored by Volcker, this option would keep the fundamental structure of Bretton Woods, but it would make several modifications to address shortcomings:
This strategy may have worked, however without an impetus to force negotiations, it would be a slow and grinding process, and there could be a crisis in financial markets before tangible progress was made.
Option 3: Close The Gold Window
This is obviously the way things went, but it was seen as radical in 1969, and it did not come without risks. It was meant as a shock treatment to force allies to the negotiating table, but at the height of the Cold War, the West needed to maintain a unified front against the Soviet Union. In 1972 especially, Nixon was preparing for his Beijing trip and he did not want ongoing squabbles with his allies.
In addition, the competitive currency debasements of the 1930s were fresh in recent memory. The shock of this option carried the risks of capital controls, protectionism and the use of exchange rates as economic weapons.
Option 4: Devalue The U.S. Dollar Against Gold
In this case, the U.S. would unilaterally adjust the dollar-to-gold exchange rate, for example from $35 to $38 per ounce of gold. This option was also presented for completeness, but it was not given much consideration. Since exchange rates were fixed, foreign currencies would simultaneously be devalued against gold, and no advantage would be gained.
As with other options, this would require negotiations for an exchange rate realignment, and could lead to competitive devaluation. It would also effectively steal some of the wealth of American allies, since they had large dollar holdings. And it would give an advantage to the Soviet Union, with its large gold mines.
Nixon’s economic team continued to refine and debate options, however in May of 1971 financial markets forced the issue. A prominent group of West German economists called for a revaluation of the deutsche mark, which caused unsettlingly large amounts of money to start to flow out of the dollar into other currencies, anticipating a realignment of values. West Germany was forced to let the deutsche mark float, essentially abandoning its fixed exchange rate obligation. France, Belgium and the Netherlands demanded dollar-gold conversion, in amounts large enough to stoke fears of an uncontrolled run on gold. This period was described as “the death watch for Bretton Woods.”
The world looked to the U.S. for leadership on a response, but frankly, the Nixon administration did not have its act together. Officials tried to project stability, and reaffirmed the U.S. commitment to convert gold at $35/ounce. But internally, Nixon’s team had a fractious meeting at Camp David on June 26 — prior to the famous August meeting — which produced only conflict and competing views. In the following week, Nixon berated a meeting of his Cabinet. Paraphrased by his chief of staff, Nixon’s message was: “We have a plan, we will follow it, we have confidence in it … If you can’t follow the rule, or if you can’t get along with the Administration’s decisions, then get out.”
Nixon designated Treasury Secretary Connally as the sole point of contact for the press. Throughout July, Connally spoke of calm and “steady as she goes,” while internally, he worked with Volcker and others on fundamental changes to the structure of the postwar economic order. Several Congressmen started proposing their own plans, and Connally urged Nixon to take the initiative. He told Nixon, “If we don’t propose a responsible new program … Congress will make an irresponsible one on your desk within a month.”
As the weekend of Aug. 13-15 approached, a serious new rumor reached Volcker’s desk. The U.K. had asked for “cover” for $3 billion of their reserves — a guarantee of the value of their holdings in gold terms, in case the dollar was devalued. This was actually a miscommunication — they had asked for a much smaller amount, less than $1 million. But the specter of a run on gold appeared very real as Nixon’s team reconvened at Camp David.
By this point Volcker’s original options had been fleshed out as a comprehensive program, with features meant to appeal to both capital and labor, and others to force the allies to the negotiating table. The main points were:
The main points were essentially decided before the Aug. 13-15 weekend. Nixon used the meeting to let all his advisors air their views, and feel as though they had been heard. The most contentious issues were the gold window, and wage and price controls. Interestingly, Arthur Burns argued strongly against closing the gold window, and almost succeeded in convincing Nixon of his view. Once the plan was set, though, the main substance of the weekend was in figuring implementation details, and planning the speech to present the plan to the nation.
The domestic reaction to Nixon’s Sunday night televised speech was almost unanimously positive — from the stock markets to business and labor leaders. There was some criticism that wage and price controls would favor business over labor, but the import tariff placated labor, as protection against cheap imports. Democrats were caught off guard that Nixon had taken several of their ideas as part of his plan, thus grabbing the credit for them. But overall, the total plan was seen as a bold new direction which seized the economic initiative in charting a path forward.
The real test of Nixon’s plan would come with America’s allies. They were furious at not being warned in advance, and the tariff and exchange rate realignment would pose serious challenges for their economies. Tense negotiations would follow, with regular threats of retaliatory measures.
In December 1971 new fixed exchange rate levels were agreed, and the import tariff removed. However, most countries would not follow through on their commitments, and in 1973 a fully free-floating environment was established. The dollar would retain its global preeminence, especially with the advent of the petrodollar.
The U.S. economy was strong in 1972, and Nixon triumphed in the diplomatic arena, with trips to Beijing and Moscow. Nixon won a landslide reelection, and he and his wife topped a Gallup poll of “Most Admired Men and Women in the World.” Only later would he fall from the presidency through the disgrace of the Watergate scandal.
Wage and price controls were initially very popular, and appeared to be keeping inflation in check. However, they led to a large and unwieldy federal bureaucracy, and these controls were eventually scrapped in 1974. The resulting pent-up inflation would come to define much of the American economy through the 1970s.
What’s striking in reading through the history of high-stakes currency policy is that countries always seem to be riding the ragged edge of disaster. Following the Nixon shock of 1971, there were a regular series of crises. There was a dollar “rescue” in the Carter administration, followed by the Plaza Accords, Long-Term Capital Management (LTCM), 2008 and on and on.
Bitcoin is often criticized for its “volatility,” but national fiat currencies do not have the best track record in this respect. By contrast, Bitcoin’s network operation is stable and robust, and its value proposition is unambiguous. Temporary shocks like 3AC and Celsius pose no danger to Bitcoin itself, unlike the latest “threat to capitalism” from Lehman, Greece or whatever else is the current insolvent organization.
Bitcoin is a bottom-up system which allows regular plebs to store their own economic value, without having to rely on far-off political negotiations. As we stay humble and stack sats, Bitcoin provides stability for long-term planning and a high degree of certainty during crazy times.
This is a guest post by Wilbrrr Wrong. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.