I.O.U.S.A - Addison Wiggin [79]
Although the dollar had its ups and downs during my career, it has been an interesting period, to say the least. After World War II, we started out with a bright new monetary system, the so - called Bretton Woods system, which IMF created. The basic fulcrum of the Bretton Woods system was the stability of the dollar and its 161
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162 The
Interviews
conversion into gold. It was assumed that exchange rates would be fi xed and not change very much. And that ’ s the way it was for about 20 years. In the 1960s, the system came under increasing pressure when the United States had a small amount of infl ation.
At that time, this small infl ation was actually considered rather large, particularly against the growth of other countries whose economies were becoming stronger. While other countries got more dollars and exchanged some for gold, we began running balance - of - payment defi cits. That put pressure on the Bretton Woods system. In 1971, we broke away from it. At that time, I was the secretary of the Treasury for monetary affairs, so I was right in the middle of that decision making.
Q: How did you feel about the decision at the time?
Paul Volcker: Well, I was in favor of the decision. I was one of the proponents of the decision, but I had very mixed feelings about it because I was brought up in defense of the system. I believed that the dollar should be supported at the center of that system and that a stable monetary system was important to the prosperity of the world. The system was set up in reaction to the turmoil in the 1930s — in the Great Depression of the 1930s — which had a lot of currency instability and antagonism between countries.
So to see that system potentially undercut was a rather traumatic experience for me, especially since I was hoping for it to be restored at the time.
Q: Once the Bretton Woods exchange rate system was abandoned, did the Federal Reserve became the proponent of a sound currency?
Paul Volcker: Once we moved off gold, which was kind of the last vestige of a gold - based system, we entered a world of so -
called fi at currencies. In that world, there ’ s nothing behind money except the credibility of the government and of the central banks. They have the responsibility of maintaining the stability of the currency. Yet this country and other countries did not always honor this responsibility because of the ever -
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and maintaining full employment or economic growth. I think maintaining full employment is a false economy. Most central bankers and most economists now understand that you shouldn ’ t set up full employment in opposition to stable currency, but the stable currency domestically is important to building a base for prosperity over the long run.
Q: Following the end of the Bretton Woods era, the United States entered an era of rapid infl ation. Were you surprised at the high rate of infl ation? What do you think were the root causes of the ’ 70s infl ation that led to you taking over the Fed?
Paul Volcker: Well, I don ’ t know whether it ’ s fair to say I was surprised. I was disheartened, I suppose. It is diffi cult to sustain the domestic price stability. But there was a combination of problems that led up to this high level of infl ation. The 1970s was also a period of great instability in exchange rates, which led to some diffi culties for the economy and for relations with other countries. People had become rather inured to a small amount of infl ation. And as I indicated earlier, there was this feeling of a trade - off between maintaining price stability or maintaining economic growth. I think that this false trade - off made people more relaxed than they should have been. When these infl ationary forces began getting stronger, it affected wage demands and pricing policies, and had a certain built - in momentum. And that whole process was aided and abetted by the big increases in oil prices and was something