Bretton Woods and the Great Inflation

60 Pages Posted: 10 Dec 2008 Last revised: 21 Nov 2013

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: December 2008

Abstract

In this paper we show that the acceleration of inflation in the United States after 1965 reflected a shift in perceived responsibility for managing the country's international financial position. Prior to 1965 this responsibility was lodged primarily with the Fed, whose policies resembled those of a central bank playing by the gold standard rules of the game. Over time, however, this responsibility was increasingly assumed by the Treasury, while the Federal Reserve acquired increasing room for maneuver as a result of the adoption of the Interest Equalization Tax and other policies with effects analogous to capital controls. Once the external constraint shaped policy less powerfully, the Fed pursued other goals more aggressively, resulting in more inflationary pressure. We document these points with a quantitative and qualitative analysis of the minutes of the Federal Open Market Committee.

Suggested Citation

Bordo, Michael D. and Eichengreen, Barry, Bretton Woods and the Great Inflation (December 2008). NBER Working Paper No. w14532. Available at SSRN: https://ssrn.com/abstract=1312626

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Barry Eichengreen

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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