From Bretton Woods to World Inflation: A Study of the ... (ISBN 0895266172)

Blind since Bretton Woods:
If then, a blind man guides a blind man, both will fall into a pit. What is true for individual men is also true for the organizations that lead them. Hazlitt makes the sound case that the IMF is the root cause for world inflation. Henry Hazlitt, a man who was one of the greatest thinkers of our time, assembled in this book a series of editorials that he wrote while working at the New York Times when the Bretton Woods agreements were being constructed in 1944 and 1945. Hazlitt's recurring criticism of the IMF was that it put too much pressure on the US Dollar as the world reserve currency. Under Bretton Woods, currency exchange rates were fixed as opposed to today where rates are deciphered and freely set by the market. No requirements were put on borrowing governments to keep their financial house in order. Governments could irresponsibly print currency and the US would have to buy that foreign fiat at the previously agreed fixed rate which was ultimately much higher than a free market would have paid. Now you know how the gold supply in this country went bye-bye. Hazlitt specifically cites the subsidizing of the French Franc at levels far above what a free market would tolerate, as being the reason the US was drained of most of its gold. Nixon doesn't get all the blame here folks. As stated on page 19 in the book, "The world dollar-exchange system was inherently brittle, and it broke." Hazlitt also pointed out that The World Bank could lend prudently to counties that needed to rebuild after the war and that the IMF wasn't really needed. He also mentions different financial organizations that expressed the same thinking. Their sound reasoning was ignored. When Lord Keynes (the lead author of Bretton Woods) appeared before the House of Lords in England to promote his economic theory, he proudly stated that it was the exact opposite of a gold standard. Lord Keynes; as Hazlitt so aptly described him, as a man confused by the triangular exchange through the medium of money; ignored the necessity of production in favor of an orderly devaluation of currency. Talk about a blind guide. Opposite indeed! Hazlitt urged the return to the gold standard as the only way to save the world's economic system. If a government is on a gold standard, they have to be fiscally responsible. And if every government is being responsible monetarily, then exchange rates will stabilize themselves. Henry offered a solution to the United States. Announce the return to a gold standard in a few years time. Meanwhile, balance your budget for the few years leading up to that return. Only then, will confidence be restored in the currency. That advice was given twenty-three years ago and fell on deaf ears. If you're counting, that's two out of three monkeys. I suppose the modern solution would be to enact a permanent pay-go law that the government had to stick to. And that interest rates shouldn't be suppressed to an unnaturally low level. Even Milton Friedman observed that the Fed has an "obsession" with interest rates. If you look up the dictionary definition for obsession, you'll see it to be an accurate description of the situation. Every time the Fed meets, they report inflation as if it were some economic constant being tamed by current financial engineering. The truth is that inflation is an economic consequence that cannot be controlled. The bad monetary decision making on government's part has to stop for it to be eradicated. The fact that almost every government reports inflation as a constant, in and of itself, proves Hazlitt's point. Unfortunately, since most people have lived with it being reported all their lives, they too view it as a fact of life. It's no wonder Marc Faber recently described all fiat currency as confetti. Things are different in the world now. The governments around the world have the ability to produce as opposed to the chaos after WWII, when everyone but the US was bombed to ashes. Currency has a free market and different national groups won't be so quick to listen to the IMF. Today individuals can own gold themselves, so they can be their own central banker in a sense, and preserve their current purchasing power. It's almost a joke now when the IMF comes out and states what currency values should be, as they have done in the last few days. No one remembers Bretton Woods, nor do they care to have some abstract organization dictate how much purchasing power they should have. Unfortunately, it's the holders of US currency that will now suffer the most as the reasons for the IMF have faded, but their consequences remain. Every time the price of gold establishes a new higher base, it is a worldwide vote of no confidence in the US Dollar. The same is true to a smaller extent for the rest of the world's currency, since gold is the only recognized form of money that is not an instrument of debt. People don't believe the US Treasury Secretary when he says that a strong dollar is in the best interest of the United States. The public recognizes that it's his job to speak no evil. He's become the third monkey.