by Bill O’Grady | PDF
Next week, we will observe the 50th anniversary of President Nixon’s decision to exit the Bretton Woods agreement. This choice was part of a broader package of policy actions designed to deal with a series of issues, including inflation, unemployment, and a balance of payments problem. As is often the case, the focus of attention from Nixon’s address to the nation was probably on the announced wage and price freeze. But, his decision to end the link to gold was monumental. We have discussed this issue before, but in light of the impending anniversary, it seemed right to revisit it again.
This report begins with a review of the problems Nixon faced and how he addressed them. To put the issue into context, we examine two trilemmas: 1) Robert Mundell’s trilemma, which frames exchange rate, capital account, and monetary policy; and 2) Dana Rodrik’s trilemma, which analyzes the relations between global economic integration, domestic politics, and the nation-state. From there, we look at the world Nixon wrought, what remains, and what is struggling to be maintained. As always, we close with market ramifications.