The Gold Exchange Standard and beyond

1
The Gold Exchange Standard and beyond
2
1943

• Yalta was more than just the political division
  of the world

3

• Bretton Woods, NH

4
Bretton Woods 1944

• The Gold Exchange Standard is born

5
Bretton Woods 1944

• IMF and the IBRD promote balanced growth and
  avoid currency wars
• The US becomes the central reserve currency
• The US becomes the only currency convertible in
  gold.
• 1 oz. gold US35
• All other major currencies convertible in US at
  fixed rates (/- 1.25)
• All countries must run balanced accounts,
  devaluation allowed only to correct "structural
  imbalances
• Ordinary drawings allowed to correct for
  temporary imbalances

6
Bretton Woods reflects the balance of power at
the end of WWII

• In 1945, the US accounted for over 50 of the
• world industrial output
• international trade
• world stock of monetary gold

7
The Gold Exchange Standard (1945-1971)

• The Shortage of US (1945-1960)
• The Decline of the GES (1963-1971)
• The Demise of the GES (after 1971)

8
The Shortage of US (1945-1960) A summary

• The only source of US was the US trade deficit
• (Rueff's deficit without tears, Triffin's
  paradox)
• Major Western European currencies become
  convertible in US in 1958
• The Interest Equalization Tax and the Foreign
  Credit Restraint Program control the supply of
  US
• The rise of Eurodollar

9
JFK wants a stronger America

• He is weary of expansionist monetary policies

10
November 1963 LBJ is sworn in

• He wants to have the cake and eat it too

11
LBJs approach

• Wage war in Vietnam
• Increase social spending The Great Society

12
Where is the money coming from?

• Just print more

13
The French government converts all its dollars

• US gold reserves dwindle dramatically
• The stability of the GES is seriously threatened

14
The Decline of the GES (1963-1971) A summary

• The Vietnam War and LBJ's Great Society
• (Medicare, Medicaid, food stamps, welfare
  payments, etc)
• US expansionist monetary policy
• Relative decline of US international position
• Decline of US stock of monetary gold
• (in the late 60s the French government converted
  all its US into gold)
• Special Drawing Rights are created to enhance
  international liquidity
• ("watering the lawn under heavy rain,"
  "surrealism in the monetary system," etc.)

15
The Demise of the GES and beyond

• Aug. 1971 Nixon suspends US convertibility
• Dec. 1971 US devalued to 38/oz 
• June 1972 British pound allowed to float
• Jan 1973 Swiss franc allowed to float
• Feb 1973 US devalued to 42.22/oz 
• March 1973 all major currencies floatthe
  European Snake
• 1973-74 OPEC oil embargo
• March 1979 EMS created
• Aug. 1982 Latin American debt crisis
• Feb-Sept. 1985 US peaks Plazza Accord
• 1989 End of communism in Eastern Europe
• Dec 1991 The Maastricht Treaty plans for the
  EMU
• Sept 1992 EMS crisis high German interest
  rates, the ITL and quit the EMS
• July 1993 Major EMS realignment
• 1998 The C sinks to record levels
• Jan. 1999 The Euro