scott bruckner and jeff capasso. fixing of a currency to a set amount of gold forms of currency...
TRANSCRIPT
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
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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.