Not quite halfway into his one term occupying the White House, President Carter was clearly fed up. Rising into that office ostensibly to accomplish what his hapless predecessor obviously could not, the Georgian’s folksy Southern image which had proved its devastatingly effective campaign counterpoint to President Ford’s bumbling if affable presence was no longer so potent. Governing, at the very least, requires some idea as to how to do it.
Looking back at it from our post-Cold War perch, our collective recollections might be tainted by what had been the Big Issues dominating that age’s final chapter – the Soviets and any prospects for a nuclear flare-up. Yet, that hadn’t been the major hang-up for much of the Seventies, and it certainly wasn’t the big thing on the President’s mind in November 1978.
Like Ford, Carter came to be preoccupied by inflation; which had spiraled under his watch into a full-blown currency crisis of the kind regularly popping up in the more pitiable jurisdictions of fading European powers. The dollar death came about as yet another reminder that the American dream was being withered away by unknown and unseen actors (to which, instead blaming the American people, the President claimed six months later it was all a shortage of “confidence”).
To end October ’78, Carter’s monetary brain trust, staffed by the usual stiff staff members drawn from the Fed and Treasury, devised their latest genius fad, a dollar “rescue” package as celebrated in Ivy League schools as it was a confusing, monstrous red herring to the layperson employing only common sense.
Regardless, though Carter was styled as the he’s-one-of-us President, he put the thing forward to a haggard, reasonably skeptical public anyway, justifying the nonsense with technospeak nonsense:
“…the continuing decline in the exchange value of the dollar is clearly not warranted by the fundamental economic situation…as a major step in the anti-inflation program, it is now necessary to correct the excessive decline in the dollar.”
You could practically hear the future Clintonian pedantry in the phrase “is clearly not warranted.” Just what did he mean, therefore, by the fundamentals?
It seemed perfectly clear that in the dollar’s downward dive such a thing was unreservedly deserved; not by its devasting impact of misfortune suffered by the unfortunate regular souls who end up paying the bill for these grand errors, but as the necessary consequence of prolonged official incompetence. Those tasked with fixing the ever-growing mess were of the same, and often exactly the same, as those who let it happen in the first place.
The proposed (and quickly enacted) rescue amounted to several things, but mostly related to official intervention in currency markets. These had been set free to float earlier in the decade by the equally economically risible regime under Nixon.
At least that was the story you’ve been told ever since.
In August 1971, President Nixon did indeed “close the gold window” ending the era of fixed dollar convertibility begun at 1944’s Bretton Woods Conference. What that meant – all it meant – was that the US government, Treasury, would no longer honor foreign official requests (demands) to redeem paper US dollars (Federal Reserve notes) payable by American gold reserves (as had been printed on the Fed’s inherently worthless paper).
The wider issue surrounding the dollar’s disease had very little to do with August 1971, and even less to do with either paper dollars or gold; the latter event merely the technical conclusion of a process long-since abandoned in effective practice. Speaking a decade later, in the early eighties, opining in the aftermath of what came to be known as the Great Inflation, Robert Roosa wryly observed a simple if overlooked unintended consequence:
“Under the fixed rate system capital flows were expected to play a subsidiary role, tending to reinforce an already impending exchange rate adjustment brought about by comparative price changes and shifts in trade. But under conditions of floating, capital flows have more and more become the prime determinants of exchange rates, thereby imposing on the current account the burden not only of adjusting for changes in relative prices or trading potentials but also of overcompensating for excesses induced by capital flows.”
To attempt to compensate for these “flows”, the November ’78 rescue rested much on something called Carter Bonds. These were US Treasury debt obligations issued in foreign currencies and not for the purposes of financing either federal government prudence or idiocy. The intention was to borrow Swiss francs and German marks from overseas markets.
The Federal Reserve had been swapping into and out of arrangements with foreign central banks for more than sixteen years by this point; and the inflation, like the dollar’s instability, had only increased during that time. Throughout that particular year, the US central bank had amassed an enormous, record amount (by the end of 1978, the reported figure was an ungodly $5.5 billion) of outstanding swap liabilities mostly with the German central bank (Bundesbank) in order to finance obviously unsuccessful currency interventions of its own initiative.
With the Fed more and more boxed in, the Exchange Stabilization Fund (ESF) had once again been mobilized to contribute what resources it might; only to have created for itself (meaning the taxpayer) a sizable negative equity position as the dollar’s exchange value kept falling further (increasing the negative equity as it did) anyway.
Central banks and fiscal governments were in control of these things – according to central bankers and the bureaucrats in each government. They merely needed to show the market who was boss, given the presumed power of the combined resources of central banks and central taxing authorities.
Carter Bonds would raise an intended princely sum of $10 billion to, essentially, bail out and therefore term-out the Fed’s and the ESF’s untenable positions (shifting the currency burden to Treasury from each), teaching the markets a lesson while it did.
While this was sold as something new, an added tool in the government’s toolkit, in truth it had been only in the sense the same tactic had been given a new name and newish sort of gloss.
In the early sixties, monetary authorities and government officials were already struggling mightily trying to figure out what was going wrong with the international currency system; an imbalance and impossibility perhaps best illuminated by economist Robert Triffin in his famous – though incomplete – paradox.
No national currency, he said, could operate simultaneously as a global reserve currency. The natural tendencies to finance economic growth in trade and increasingly monetary flows and investments (see: Roosa; capital flows) were incompatible with the demands for soundness in that instrument imposed by any responsible issuing nation.
You could have the fixed, sound dollar then imagined, or you would have to allow for expanded dollar supply so as to achieve a more closely integrated, more efficient, and decidedly higher growth global economy which undermined the sound national dollar. Triffin realized, as John Maynard Keynes had surmised at Bretton Woods in 1944, you couldn’t have both.
The wave of globalization which would dominate the second half of the twentieth century (in a very good way) had begun to truly challenge the monetary dogmas of its first half during the fifties. There are volumes which could be written about the details and history of this transition, and I’ve attempted to but scratch the surface many, many times here over the years, but for our purposes right now the best summation of them is that in the mid- to late-fifties the market, a global currency market, began to solve Triffin’s Paradox without any help or acknowledgement from comfortably confident officialdom.
An international dollar (the appended term “euro” added by accident of discovery).
And it all came to a head in the early sixties when in this rush of new “dollars” some of which being converted into US gold, draining official reserves to dangerously low levels (led by an embittered Charles de Gaulle’s France). This had provoked one series of misunderstood warnings after another.
Going back to Robert Roosa, in October 1963 he would write for Foreign Affairs magazine how, “a crisis affecting at least one major currency has threatened each year; the U.S. balance of payments has been in continuous large deficit; and the stability of the convertible gold-dollar and sterling system has been increasingly questioned.”
In one poignant example, the Canadian dollar had been seriously threatened (to break its fixed value) the year before, 1962. On June 21, the Federal Reserve’s policy-making body, the FOMC, would debate just how they might “rescue” Canada’s dollar from the clutches of, well, a flood of sudden unpopularity in the sense of what Robert Roosa had said of it in the eighties (capital flows that, in this case, were not playing a subsidiary role to fixed exchange values).
European banks (largely) had soured on Canadian prospects for a seamless re-establishing of convertibility; therefore, they began to pull “capital” from Canada in order to repatriate it back to Europe (or redeploy elsewhere in the world).
How does this involve the Fed in such an affair between Canada and Europe? Because European banks intermediated via US dollars; convert Canadian dollars to US dollars (eurodollar market) and then to whatever other currency thereafter. It still goes on like this today.
What the Fed, the Treasury, and global monetary officials came up with to attempt mitigation of these non-subsidiary Canadian outflows was as ridiculous as it would become typical and typically dense; in consideration for space, I’ll just reprint what I wrote in early 2016 summing it up this way:
“[Y]ou truly have to read through that tangled mess of central bank liabilities and exchange liabilities to appreciate not only what was taking place in terms of global payments and the reckoning of imbalances but also how gold was already by then totally overcome by the rule of bankers. What should have been another gold outflow from the US was instead (partially) ‘sterilized’ by a split swap arrangement that included the BIS, forming the basis of a third in purely francs, with any franc balances ended up at the US in time deposit format with the BIS.”
Undoubtedly unsurprising to you, none of those things worked. They may have saved the US reserve position from further drain, if for a time, but they did nothing so far as to command the rising tide of this foreign monetary position (eurodollars) increasingly taking over global monetary affairs; and all because monetary officials understood their job, and thus global money, only in terms of that reserve position.
As dollar pressures continued to mount for any number of other reasons in and outside of Canada and North America, throughout the sixties the swaps only grew larger and more complex still, drawing in an ever-growing list of overseas national counterparties.
Very early on in that process, the Fed found itself in serious trouble of violating its own rules and mandates by becoming entangled in this unintelligible (from its perspective) global dollar business; attempting to maintain the illusion of control and stability. To essentially bail it out of the liabilities it had created for one unproductive intervention after another (though, again, the Fed didn’t always see it this way since it had, for a time, preserved US reserve stores), Treasury began to issue what were called Roosa Bonds.
These were non-marketable US federal government debt certificates “sold” (a legal fiction created for accounting purposes) to foreign central banks, the proceeds from which Treasury then sold to the Federal Reserve for it to cancel out its swap predicaments. Roosa Bond certificate “sales” would continue throughout the sixties and on into the early seventies certainly not because they had been effective.
When the US dollar was let float in exchange value, it was presumed that this would then let the “market” work these imbalances out on their own. Yet, the background, root eurodollar causes remained unappreciated as well as unsolved either way leaving the door open for the worst parts of the Great Inflation still to come.
It had been Roosa in 1984 who, looking back, realized that “capital flows” were a new and serious challenge to the emergent global order. And, perhaps more importantly, he had come to understand just why that was, the extreme nature of this evolution:
“One improvisation after another was attempted in order to preserve or restore confidence in the credibility of the dollar as a reliable standard of value and medium of exchange capable of assuring stability in the payments relations throughout an expanding world… But this combination of improvisations could not cope with, and indeed may have contributed to, the enormous expansion in markets for U.S. dollars offshore, and the new networks of interbank relations that made possible the creation of additional supplies of dollars outside the United States and beyond the control of the Federal Reserve.” [emphasis added]
Indeed, even the FOMC had made similar albeit more primitive observations earlier in the seventies. Voiced in private in December 1974, Fed Vice Chairman George Mitchell exclaimed how, “he could think of no time when the monetary aggregates were less useful for policy purposes than they were now…Another uncertainty in the interpretation of the monetary statistics arose in connection with Euro-dollars; he suspected that at least some part of the Euro-dollar-based money supply should be included in the U.S. money supply.”
Despite the mountains of evidence and the occasional glance at it, monetary incompetence ruled for two very long, excruciating decades. Like the Great Depression had been, another incomprehensibly lengthy period of malpractice top to bottom. And it had been that way in large part because authorities refused to acknowledge these things; a lack of accountability that had, for all those years, allowed them to repeat the same failure time and time again.
Closing in on fourteen years nowadays, the consequences and root cause have been flipped while the standard official script has not. Whereas Presidents Johnson through Nixon and Ford and onto Carter and even Reagan desperately sought control over too much inflation, beginning with Bush (43) followed by Obama then Trump and now Biden each stumped to figure out any way to unleash even a tiny bit.
In neither era had there been put forward even a plausible explanation for why; instead, the official sector simply repurposes useless, ineffective tools and claims each as new in order to (try to) fool the masses into believing the powers of stability and control rest solely in itself. A malpractice of institutional inertia, this repetition represents the fact they truly don’t know what else to do.
In truth, the Federal Reserve’s history has been far, far more one of exactly this sort of thing; gross monetary dereliction is its standard baseline. Only by pure accident does it appear to get things right and only then under ideal conditions (the Great “Moderation” which had been nothing more than a maturing eurodollar system). From the extended Great Depression to the protracted Great Inflation and now whatever you want to call the last decade and almost a half (Silent Depression, as Emil Kalinowski does), the central bank’s monetary track record is far more heavily dominated by these agonizingly drawn-out misses than any arguable successes.
Even the Great “Moderation” hadn’t actually been very moderate!
We are living in the eurodollar’s world and have been for more than six decades. When it was expanding initially, it created inflationary problems officials didn’t want and dollar’s dive they couldn’t arrest. Now that it continues to malfunction, it has left the world robbed of growth and so little inflationary advancements officials can’t figure, and dollar “strength” they can’t pass.
Biden-omics, including the devaluation, at least, of the word “infrastructure” is little more than a bigger of Trump’s TCJA, or Obama’s ARRA in the same way Carter Bonds were an enlargement of Roosa’s certificates. Failure, too, is entirely bipartisan; that much forever in common. For those expecting big even inflationary things this time around, history just isn’ton your side.
And, despite everything going on and going right recently, neither are eurodollars.
