Fixing of a currency to a set amount of gold Forms of currency Commodity money Representative money Fiat money
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
Deflation in 1930s April 1933 - Ha!...How do I know its any good? Only the fact that I think it makes it so. 1934 – Once again re-established $35.00 to an ounce.
International Monetary System 44 allied nations United Nations Monetary and Financial Conference Bretton Woods, New Hampshire Created: July 1944
Fund postwar reconstruction Free International Trade Lowering tariffs Balance of trade Stabilize the worlds exchange rates Free convertibility of currencies
The Great Depression Currency devaluations to increase competiveness of exports Trade between currency blocs World War II President Roosevelts Atlantic Charter All nations have the right to equal access of trade and raw materials Freedom of the seas
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.
Established December 27 th 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
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
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
Growth of international currency markets Three quarters of the worlds largest banks formed international syndicates Hedge and speculate against exchange rate fluctuations By the 1960s, the U.S. was no longer the dominant economic power: Rivaled with Europe and Japan
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
1880 – 1914 – Inflation averaged.1% 1970s, 1980s – Inflation up to 5%
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
Banks were expected to play by the Rules of the Game Discount rates – lending rate France and Belgium Sterilization
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
Post-War Adjustments Reduction of Uncertainty in International Trade Rep. Ron Paul and Lehrman Low Interest Rates Increased Savings Price Stability
Bordo, Michael D. "Gold Standard." LIbrary of Economics and LIberty. 10 Mar. 2009. 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. 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.