THE GOLD STANDARD AND BRETTON WOODS

Scott Bruckner and Jeff Capasso

WHAT IS THE GOLD STANDARD?

Fixing of a currency to a set amount of gold

Forms of currency Commodity money Representative money Fiat money

GOLD STANDARD AND THE U.S.

1834 – De facto acceptance of gold standard 20.67 dollars for an ounce

1900 – Formal establishment of standard Congress passed Gold Standard Act

Power of governments/investors

F.D.R. DISBANDS STANDARD

Deflation in 1930s April 1933 - “Ha!...How do I know it’s

any good? Only the fact that I think it makes it so.”

1934 – Once again re-established $35.00 to an ounce.

THE BRETTON WOODS SYSTEM (1944-1971)

International Monetary System 44 allied nations United Nations Monetary and Financial

Conference Bretton Woods, New Hampshire Created: July 1944

OBJECTIVES

Fund postwar reconstruction Free International Trade

Lowering tariffs Balance of trade

Stabilize the world’s exchange rates Free convertibility of currencies

PRECURSOR'S OF BRETTON WOODS

The Great Depression Currency devaluations to increase

competiveness of exports Trade between currency blocs

World War II President Roosevelt’s Atlantic Charter

All nations have the right to equal access of trade and raw materials

Freedom of the seas

BRETTON WOODS’ CONFIGURATION

Fixed exchange rates U.S. Dollar set as the reserve currency U.S. Dollar adopts the role which gold

had in the Gold Standard U.S. Dollar linked to gold at the rate of

$35 per ounce of gold.

INTERNATIONAL MONETARY FUND

Established December 27th 1945 International organization which

oversees the financial system Stabilizes international exchange rates

and facilitates development Established a fund filled by quota

subscriptions Lessen the rate of Cash-poor nations

reducing capital outflow by restricting imports

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Established June 25, 1946 Promoted the growth of world trade

and to finance the postwar reconstruction of Europe

Capitalization of $10 Billion Currently one of the five institutions

that makes up the World Bank Group

DECLINE OF THE BRETTON WOODS SYSTEM

In 1950, the U.S. balance of payments swung negative and weakened the US Dollar

The open gold market in London 8 nations created the “London Gold Pool” to

sell gold on the open market when the price of gold spikes and recover once it drops

In 1967 the government issued Special Drawing Rights where interest would be credited to the nations holding these SDRs

DECLINE OF THE BRETTON WOODS SYSTEM (CONT.)

Growth of international currency markets Three quarters of the world’s largest banks

formed international syndicates Hedge and speculate against exchange

rate fluctuations By the 1960’s, the U.S. was no longer

the dominant economic power: Rivaled with Europe and Japan

DECLINE OF THE BRETTON WOODS SYSTEM (CONT.)

The Vietnam war accelerated financial stress and inflation

U.S. gold coverage fell from 55% to 22% The “Nixon Shock”

Excessive printing of money devalued the dollar

In December, 1971, Nixon cancelled the Bretton Woods System and stopped the convertibility of U.S. dollars to gold

HOW AN INTERNATIONAL SYSTEM WORKS

Innovation Leads to Lower Prices in U.S.

ECONOMIC EFFECTS

1880 – 1914 – Inflation averaged .1% 1970’s, 1980’s – Inflation up to 5%

WHAT IS MONETARY SHOCK?

California and Australian Gold Discoveries

Shock in one country affected another one.

Short-term instability equationCoefficient of Variation

Std Dev. Of Annual % Changes to Price Level

--------------------------------------------------------------------------

Average Annual % Change

DEPENDENCE ON BANKS

Banks were expected to play by the “Rules of the Game”

Discount rates – lending rate

France and Belgium “Sterilization”

DISADVANTAGES OF A GOLD SYSTEM Loss of control over economic policy Rate of gold production determines

monetary policy Increase leads to inflation, decrease leads to

deflation

Inability to escape a recession Lack of gold Resource cost of producing gold

ADVANTAGES OF A GOLD SYSTEM

Post-War Adjustments Reduction of Uncertainty in

International Trade Rep. Ron Paul and Lehrman

Low Interest Rates Increased Savings Price Stability

WORKS CITED

Bordo, Michael D. "Gold Standard." LIbrary of Economics and LIberty. 10 Mar. 2009 <http://www.econlib.org/library/Enc/GoldStandard.html>.

Eichengreen, Barry J. Golden fetters the gold standard and the Great Depression, 1919-1939. New York: Oxford UP, 1992.

Hawtrey, R. G. The Gold Standard in Theory & Practice. London: Longmans, Green and Co., 1948.

Hinshaw, Randall. Monetary Reform and The Price of Gold. Baltimore: Johns Hopkins P, 1967.

Moffatt, Mike. "What Was the Gold Standard." About.com. 10 Mar. 2009 <http://economics.about.com/cs/money/a/gold_standard.htm>.

Paul, Ron, and Lewis Lehrman. The Case for Gold: A Minority Report of the U.S. Gold Commission. Rep. Auburn: The Ludwig Von Mises Institute, 2007.

Shlaes, Amity. "Contracts as Good as Gold." Wall Street Journal [New York] 5 June 2008, Eastern ed., sec. A: 21.