Bretton Woods and the Great Inflation
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.
Paper presented at the NBER Conference on the Great Inflation Woodstock, Vermont, September 2008. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Bretton Woods and the Great Inflation, Michael Bordo, Barry Eichengreen. in The Great Inflation: The Rebirth of Modern Central Banking, Bordo and Orphanides. 2013