The benefit of the Gold Standard and the Bretton Woods monetary system

Today we will talk about what was as a starting point for what is to come. In order to better understand what is coming, in this article we will talk about how it was with the Bretton-Wood monetary system based on the gold standard. In the next article in the series on the Gold Standard, we will zoom in on what is coming, what is already happening, as a connection and a solid foundation based on the decisions of Bretton-Woods and the Gold Standard under the sign of the International Treasury Monetary 1.

In 1942, during the Second World War, the first proposals of the principles of the international monetary system appeared, which were supposed to help ensure the post-war recovery and economic development of countries. However, the reconstruction of the international monetary system, until then based mainly on the gold standard and convertible/inconvertible paper currencies, began on July 1 and lasted until July 23, 1944 at the United Nations Monetary and Financial Conference in the American city of Carroll, in a quiet part of the city called Bretton- Woods, New Hampshire. The Allies (USA, England, France and Russia) already considered themselves the winners of World War II in 1944. world war, representatives of another 40 countries were invited to the conference, for the purpose of a new arrangement of the world. Representatives of 44 countries of the world participated in the conference to define the main features of the post-war monetary arrangement and develop a proposal for a new international monetary system with fixed exchange rates.

It was a struggle for supremacy, in the new, post-war world, led by England and the USA. In other words, English and American banks, since the central banks of both countries were privately owned. The main actors of the agreement itself were negotiators Harry Dexter White, adviser to the US Treasury Secretary and John Maynard Keynes, an economist from Great Britain.

As is widely known, the bankers have canceled the gold backing of the currency. The English, represented by J.M. Keyenes, proposed the fictitious world currency BANCOR. They proposed to set an exchange rate for all regional currencies. Everyone could keep their own currency, but at the international level individual states had to trade with BANCOR.

Keynes got the short end of the stick in negotiations with Dexter White. On the contrary, Dexter White succeeded against Keynes - the American dollar became the main world currency. A system based on floating exchange rates was to end and a fixed exchange rate system was to be introduced instead.

In practice, this meant that it did not matter how much the country's economy would grow and how hard the country's citizens would try, because it would have no effect on the value of their currency on an international scale. The fixed exchange rate was established on July 22, 1944, and was to apply forever.

BANCOR has become a thing of the past, at least for now. However, there were still strong voices from several states that did not want to give up the gold and agreed to certain regulations. They clearly wanted to return to the gold standard, which they gave up during World War I, so that countries at war could finance military operations through banks. In other words, for banks to print as much money as needed.

The agreed principles of the monetary arrangement were to be implemented by the newly created organizations - the International Monetary Fund and the World Bank. Institutions that were supposed to supervise the observance of already established rules, supervise the reconstruction of the world after the war and later, make sure that the FED (Central Bank of the USA) does not lose its powerful influence.

Among the main conclusions and benefits of the Bretton Woods agreements was the establishment of a new transnational monetary institution, the International Monetary Fund, whose primary function will be to lend money to member countries that have run into problems with the current account of the balance of payments and do not have sufficient foreign exchange reserves. However, the loans were not to be automatic, but conditional on the implementation of economic measures, in accordance with the new international monetary arrangement. The International Monetary Fund continuously administers the international monetary system and has the role of a central bank vis-à-vis central banks. Member countries contribute to it by borrowing their currencies, which then lends them to countries that are in a problematic situation with their balance of payments. In recent years, the International Monetary Fund has also played a key role in organizing a unified response to the international debt crisis and helping former communist countries transition to an open market.

Another international institution that was created after the Second World War on the basis of the Bretton Woods agreements is the World Bank. The World Bank receives capital from economically developed countries, which contribute amounts proportional to their economic importance. From this capital, it provides low-interest loans to countries for projects that are economically viable but cannot be financed within the private sector. The result of such long-term loans is the flow of goods and services from developed to developing countries. With the appropriate selection of projects, the countries that borrowed the funds will increase their production, wages and living standards, as foreign capital will increase the GDP of the given country. During the repayment of loans, developed countries gain by increasing the import of the necessary goods from the given countries.

The International Monetary System, which was created during the Bretton-Woods negotiations, can be considered the basis of the current International Monetary System. Its reserve currency became the US dollar, while other countries maintained their foreign exchange reserves in USD or gold.

The long battle: delegates from forty-four countries at the landmark Bretton Woods conference. Source:

The United States has pledged to trade gold with foreign central banks at $35 per troy ounce, which is a rate of $1 per 0.888671 grams of pure gold. Each country established a central parity of its currency against the US dollar and maintained a fixed exchange rate with a maximum deviation of ± 1% from the established parity through intervention purchases and sales of USD in foreign exchange markets. Changes in currency parities for individual currencies could only take place within the permitted range, up to 10% without prior approval of the International Monetary Fund, above 10% only in so-called fundamental imbalance.

Exchange rates were fixed, but adjustable. A member country could devalue or revalue the parity value of its currency only in the case of a fundamental imbalance in the balance of payments and with the consent of the International Monetary Fund. The imbalance of the balance of payments was solved in the form of drawing loans according to predetermined rules and with certain criteria conditioned by the national economy.

Although the Bretton-Woods monetary system was not perfect, in the first decade of its activity it made a relatively large effort to stabilize the monetary situation, which was significantly disrupted in many countries after the First World War. Of course, war-torn economies were calculated respecting the regime of the transition period during which they needed to build their economy. It contributed to the member states raising their national currencies to the level of free exchangeability. In the next period, its credit and other assistance developed aimed at eliminating imbalances in the balances of payments of member states and ensuring the desired level of international liquidity". The primary feature that distinguished the Bretton-Wood system from previous monetary systems was the possibility of adjusting exchange rates in cases where there was a fundamental economic imbalance of the country. The Bretton Woods monetary system was a fixed but at the same time adjustable exchange rate system.

The collapse of the Bretton Woods system

The monetary system itself went through several crises during its operation, such as in the 1960s, when the United States began to fall into ever-recurring deficits in the balance of payments, which increased the amount of dollars abroad and exerted devaluation pressures on the dollar and thus on the fixed price of gold.

In 1971, the world economy got into serious trouble. The amount of USD held in foreign entities increased to such an extent that foreign governments with surplus dollars had trouble defending their own currency. The position of the US dollar weakened and people began to lose confidence in it. Some Western European currencies fell against the falling USD. The Swiss franc revalued by 7% and the Austrian schilling by 5.5%. Foreign exchange markets were closed in Germany, the Netherlands, Switzerland and several other countries.

Richard Nixon, the US President at the time, announced in August 1971 that the US government had decided to end the convertibility of the USD for gold, thus abolishing a fundamental element of the Bretton Woods monetary system and thus essentially the era of the gold dollar standard.

As soon as the United States canceled the link of the USD to gold (15/08/1971), there was a complete breakdown of the basic links of the Bretton-Woods monetary system, which tried to achieve and maintain exchange rate stability. By abolishing the convertibility of the dollar for gold, this system ceased to function as a gold exchange standard, and the world gradually moved into a new era of flexible exchange rates.

In the early 1970s, most market economies gradually transitioned to a system of freely floating exchange rates, the so-called floating. By 1973, all countries with advanced economies had introduced it, and so the Bretton-Woods agreement was officially canceled this year.

However, the end of the Bretton-Woods agreements did not mean the end of the FED and the dollar, the World Bank and the IMF. Everything worked, but the dollar, as the world's main currency, was no longer backed by gold, resulting in an "artificial" printing of money circulating in the system.

A certain banker Ferdinand Lips wrote about it in 2003:

"It is almost incomprehensible what happened. Today, the value of the dollar is only about 5% of what it was in 1913. So why did they need the Federal Reserve, or better yet, why do we need central banks at all? It is difficult to understand why this currency has fallen so much"

(Ferdinand Lips, ,,Die Gold-Verschwörung“).

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JANKOVSKÁ, A. et al. 2003. Medzinárodné financie. 2. vyd. Bratislava: Iura Edition.

KUBIŠTA, V. 2009. Mezinárodní ekonomické vztahy. Plzeň: Aleš Čeněk, 2009.

SAMUELSON, P., NORDHAUS, W. 2000. Ekonómia. 1.vyd. Bratislava: ELITA.

ŠÍBL, D. 1996. Medzinárodné ekonomické vzťahy na prelome tisícročí.

LIPS, F. 2003. Die Gold-Verschwörung. Kopp Verlag, Rottenburg.

MORRIS, M. 2011. Was Sie nicht wissen sollen! AMA DEUS Verlag 2011.

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Ilustration image source:


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