The gold standard and BretTon woods

1. Scott Bruckner and Jeff Capasso The gold standard and BretTon woods

2. Fixing of a currency to a set amount of gold • Forms of currency • Commodity money • Representative money • Fiat money What is the Gold Standard?

3. 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 Gold standard and the u.s.

4. 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. F.d.r. disbands standard

5. International Monetary System 44 allied nations United Nations Monetary and Financial Conference Bretton Woods, New Hampshire Created: July 1944 The Bretton Woods System (1944-1971)

6. Fund postwar reconstruction • Free International Trade • Lowering tariffs • Balance of trade • Stabilize the world’s exchange rates • Free convertibility of currencies Objectives

7. 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 Precursor's of Bretton Woods

8. 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. Bretton Woods’ Configuration

9. 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 Monetary Fund

10. 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 International bank for reconstruction and Development

11. 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

12. 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.)

13. 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 Decline of the bretton woods system (cont.)

14. How an International System Works Innovation Leads to Lower Prices in U.S.

15. 1880 – 1914 – Inflation averaged .1% 1970’s, 1980’s – Inflation up to 5% Economic Effects

16. California and Australian Gold Discoveries Shock in one country affected another one. Short-term instability equation Coefficient of Variation Std Dev. Of Annual % Changes to Price Level -------------------------------------------------------------------------- Average Annual % Change What is Monetary Shock?

17. Banks were expected to play by the “Rules of the Game” Discount rates – lending rate France and Belgium “Sterilization” Dependence on banks

18. 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 Disadvantages of a gold system

19. Post-War Adjustments • Reduction of Uncertainty in International Trade • Rep. Ron Paul and Lehrman • Low Interest Rates • Increased Savings • Price Stability Advantages of a gold system

20. 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. Works Cited