As I understand it, pre-FDR the Fed was relatively powerless to increase the money supply because of the gold standard. From 1933-1945 the dollar was essentially a pure fiat currency, and from 1945-1971 was Bretton Woods.
My questions is during Bretton Woods did the Fed have the ability to inflate the money supply through open market operations? That is, did it regularly buy treasury securities with printed banknotes as it does today, or was it limited exclusively to gold purchases?
Thanks
At least he wasn't a Keynesian!
As I understand it, pre-FDR the Fed was relatively powerless to increase the money supply because of the gold standard.
Incorrect.
Clayton -
Open market operations began in 1922 under Benjamin Strong.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Well technically the "rules of the game" in BW stipulated that each country had to fix their currency to a certain amount of gold, and change it only when B.O.P disequilibria was severely affecting the country. In reality few countries ever adjusted it because of pride/prestige (devaluing the currency is a loss of pride and national confidence, while having a surplus means you are accumulating large official reserves). Because nations didn't want to change their E.Rs, and because the dollar was main currency, the Fed was somewhat limited. As I'm sure you know, the BW system involved the dollar being defined at $35 an ounce of gold, and then all foreign currencies defined in dollars (and therefore implictly in gold). The Fed still had a great deal of power, it just technically had a limit. If it printed too much money, foreigners would lose confidence in the U.S and think the dollar was overvalued, cashing all of their dollars in for gold. However, I think it still had a much bigger range than other countries, mainly because the dollar was the reserve country and people also preferred to just hold dollars instead of the real deal.
This is actually what started to slowly happen in the late 50s and 60s. At first, the U.S ran large B.O.P surpluses in the late 40s early 50s. Then, it started to run deficits. Since the dollar was convertible in gold, many foreigners initially decided to just hold dollars because it was 1)As "good" as gold 2)World currency usable in international transactions 3)Could earn interest in a bank account. As the late 50s rolled around and into the 60s, when the U.S started to get involved in Vietnam, the B.O.P deficits increase sharply. The U.S paid for Vietnam by monetizing debt(the Fed) and borrowing money. Foreigners started to realize that they holding large amounts of overvalued dollars, and they began to try and exchange them for gold. U.S gold reserves fell in the late 60s, and then when it became clear that the jig was up, Nixon closed the gold window.