Gold/Bretton Woods Gold Dollar Standard

Gold/Bretton Woods Gold Dollar Standard System

The American Civil War broke out in April 1861. The Federal government primarily aimed at financing its operations mainly through means of public debt and taxation. However, at the end of 1861 it found it problematic to dispose its bonds at favorable rates. In the earlier part of the year 1862 it started issuing paper money, known as greenbacks. The greenbacks are denominated in dollars and announced to be legal tender and represented to be non-interest bearing notes. The commercial banks discontinued specie convertibility during January 1862 that resulted in quick depreciation of the dollar against sterling. After much debate, finally, on January 1, 1879, it was decided to resume convertibility in line with the Resumption Act of January 14, 1875. Besides announcing the date of resumption and the original parity, the Act also delegated powers to the Treasury to utilize its surplus revenues and the proceeds gained from the sale of bond in order to accumulate a gold reserve. The Act also eliminated the aggregate confinement on national bank notes and connected the expiry of greenbacks to the expansion of national bank notes. (Getting pegged: comparing the 1879 and 1925 gold resumptions)

Thus, as Calorniris in 1988 confirmed, the strength for restoration of the gold standard rule has come from the Act of March 18, 1869 prior to the Resumption Act that ensured redemption and principal in gold. Such restoration of Gold Standard ensuring convertibility to gold at the original parity was a success for the U.S.A. with the price of the gold continuing to be stable at $20.67 per ounce until 1933. Great Britain adopted gold convertibility after seven years of conclusion of World War I. And the parity was fixed at $4.867. The post World War I misalignment was confined since all confrontational had adopted inflationary monetary policies to finance the war. Moreover, the Britain case differed from that of U.S. In the sense that from the initiation of hostilities in August 1914 until March 1919, Britain was still formally on the gold standard. The monetary authorities however, imposed restriction on the private parties to convert paper claims into gold and pegged the pound at $4.76. After the end of hostilities, and withdrawal of impositions caused enormous gold outflows. This led to imposition of the restriction of free export of gold in form of Gold and Silver Export Control Act of 1920.

With regard to several measures after resumption, the purchasing parity was restored by 1929. After a brief recession in 1926 the British economy progressed at around 2% per annum until the initiation of the Great Depression in 1929. The gold exchange standard so adopted was an endeavor to introduce some of the advantages of the classical gold standard. The advantages include exchange rate and price level stability, rapid and automatic balance of payments adjustment, stabilizing capital flows, simultaneously, attempting to economize on gold reserves by confining the use of gold to central banks and by encouraging the substitution of foreign exchange. The gold exchange standard depicted many problems like use of two reserve currencies, the absence of leadership by hegemonic power, the failure of cooperation between key members and the reluctance on the part of the U.S.A. And France to follow the rules of the game. This resulted in the deflationary trend over the rest of the world by persistent conservancy of the balance of payment surpluses. (Getting pegged: comparing the 1879 and 1925 gold resumptions)

Evidentially, the twentieth century started with a highly effective international monetary system that was collapsed in World War I and its restructurization during the interwar period as a result of the Great Depression, Hitler and World War II. The new structures that could contribute towards its structure mostly depended upon the dollar polices of the Federal Reserve System than in comparison to the discipline of gold itself. While the connection to gold was finally adverse, the Federal Reserve System in the form of the greatest inflation the United States has yet known. The twentieth century monetary policy can be grouped under three equal parts. The first part, 1900-1933, is the era of the international gold standard, its degeneration during the war, its mismanaged restoration in the 1920s, and its ultimate discontinuance in the earlier part of the 1930s. The second phase initiated with the devaluation of the dollar and the institution of the $35 gold price and ends when the United States had taken the dollar off gold. The third phase occurred in the period 1972 to 1992 that imitated with the collapse into flexible exchange rates and continues with the subsequent inclusion of excessive inflation and stagnation in the 1970s. (A Reconsideration of the Twentieth Century)

The Bretton Woods system is normally recognized to indicate the international monetary regime that exists from the end of World War II till the early 1970s. Being derived its name from the conference of 1944 that instituted the International Monetary Fund -- IMF and World Bank, the system of Bretton Woods was history's initial example of a completely negotiated monetary order with an objective of administering currency links among the independent nations. As a norm this era began with an objective of blending legal obligations with multilateral decision-making performed via an international organization. (Benjamin. J. Cohen. Bretton Woods System) The Bretton Woods system of international monetary management instituted the norms for commercial and financial operations among the major industrial countries of the world. The chief attribute of the Bretton Woods system were a commitment to adhere to a common monetary policy that established the exchange rate of its currency within a fixed value-volatile around 1% with regard to gold and the ability of the IMF to remove imbalances of payments which are temporary. Struggling with the opposing forces the system had to degenerate in 1971 after the United States' suspension of convertibility from dollars to that of gold. (Bretton Woods System: Wikipedia)

The economic requirement of a stable exchange rate margin in Asia has reinstituted the United States as the center country in the Bretton Woods International Monetary System. It has been visualized that normal emergence of the international monetary system associates with the continuance of a periphery for which the development strategy is in terms of export led growth in conjunction with undervalued exchange rates, capital controls as well as official capital outflows in terms of accumulation of the reserve asset claims on the center country. (An Essay on the Revived Bretton Woods System)

Irrespective of the fact that the international gold standard produced the world a high magnitude of monetary unity- currencies being designated as different weights of gold, there was a general acknowledgement in the old days that a global unit of account was desirable. Most of the monetary conferences in the 19th century made this point and with the exception of Britain, most important countries were desirous to modify to some extent their monetary units so as to make 1 pound as equal to 5 dollars in turn equalizing 25 francs as the common monetary units. However, the policy of abstention refuted the norm and was in line with the general experience of hyper powers to refute meaningful international monetary reform. Irrespective of the fact that nations could exploit the advantages of stable exchange rates under the gold standard they were desirous of going further and fine-tune the system to eradicate or reduce unnecessary information and transaction costs related to the international trade. (Thematic Issues International Money as a Public Good: The Case for a World Currency)

Moreover, while preparing for the post-war system, President Roosevelt had plans for devising a global currency. At Bretton Woods conferences both America and British planned for proposing the same, however, could not be materialized. An international monetary system without a world currency was seen to be the greatest flaw. The inability to devise a world currency at Bretton Woods resulted in the special problems of the post-war international monetary system and the Triffin Dilemma. It appeared that in taking the steps for correction of the deficits, the rest of the world is going to starve for reserves and it would bring on a deflation, but if the United States did not rectify its deficit, there is the possibility of occurrence of the monetary crisis and a degeneration of the system. To overcome the problem, IMF has to move in the direction of devising a world currency, in terms of the creation of Special Drawing Rights -- SDRs that were agreed upon at the 1967 IMF meetings in Brazil. This indicated that the global leaders of the major nations and the IMF at this moment fully favored the idea of a global currency. In 1974 the backing of gold to the SDR was erased and the progress of SDR into a genuine world currency was never permitted to take the base. The 1976 agreement in Jamaica on managed flexible exchange rates was never enthusiastically endorsed even by the United States.