Glamor Economics

Chapter 113

Chapter 15, Section 4 No rules, no circle - currency system

Because gold has played the role of currency for a long time, a monetary system with gold as the standard currency was born later, that is, the gold standard system.Under the gold standard, or the value of each unit of currency is equivalent to a certain weight of gold (that is, the gold content of the currency); when different countries use the gold standard, the exchange rate between countries is determined by the ratio of the gold content of their respective currencies—coinage parity.The gold standard became popular in the mid-19th century.As Greenspan pointed out, the gold standard firmly curbed the spread of inflation, but the limitations of the gold standard system itself also determined that it must be eliminated with the development of history.

In 1914, after the outbreak of the First World War, the United Kingdom issued a large number of banknotes in order to raise military expenses, and at the same time paid a large amount of gold to purchase military supplies from the United States.The issuance of banknotes increased sharply, and the amount of gold reserves dropped sharply. The original price ratio between banknotes and gold could not be maintained.Britain had to stop converting the pound to gold during the war, temporarily abandoning the gold standard.In the great world economic crisis from 1929 to 1933, the British gold standard collapsed completely.

Subsequently, various countries issued banknotes that cannot be cashed, and the free export of gold was prohibited, and the gold standard came to an end.With the gradual rise of the US dollar, the era of the Bretton Woods system began to come.

In 1944, more than 44 representatives from 730 countries of the Allied Powers gathered at the Mount Washington Resort Hotel in Bretton Woods County, New Hampshire, USA. After 20 days of meetings, they finally quarreled with a result, that is, the famous Bray The Tun Woods system, the world's first global financial and monetary system agreement, was born at this time. The "Bretton Woods Agreement" stipulates that the US dollar should be the main international reserve currency based on gold.The U.S. dollar is directly linked to gold, while the currencies of various countries are linked to the U.S. dollar, and can be exchanged for gold in the United States at the official price of $35 per ounce.The dollar can be exchanged for gold and countries implement an adjustable pegged exchange rate system, which constitutes the two pillars of this monetary system.This is the Bretton Woods system.

The "Bretton Woods Agreement" also established the International Monetary Fund, referred to as IMF, which is the central institution to maintain the normal operation of the system. It has three major functions: monitoring international exchange rates, providing international credit, and coordinating international monetary relations.At the same time, the World Bank also came into being. Its main responsibility is to provide long-term loans and help developing countries provide physical capital.The funds for these loans mainly come from bonds issued by the World Bank in the capital markets of developed countries.

The formation of the Bretton Woods system temporarily ended the chaotic situation in the monetary and financial fields before the war, and maintained the normal operation of the post-war world monetary system.The fixed exchange rate system is one of the pillars of the Bretton Woods system, but it is different from the relative stability of the exchange rate under the gold standard.The formation of the Bretton Woods system expanded world trade under relatively stable conditions.The United States distributed a large amount of dollars to the world through gifts, credits, and purchases of foreign goods and labor services, which objectively played a role in expanding the purchasing power of the world.At the same time, the fixed exchange rate system largely eliminates the turmoil caused by exchange rate fluctuations, stabilizes the currency exchange rates of major countries to a certain extent, and is conducive to the development of international trade.

An important feature of the Bretton Woods system is that the United States was established as a reserve currency country.This is inseparable from the strong economic strength of the United States, which has also laid a hidden danger for the disintegration of the Bretton Woods system.

Because the basis of the Bretton Woods system is the US economy.If the U.S. maintains a deficit in international payments and the external value of the U.S. dollar is unstable for a long time, the U.S. dollar will lose its centrality.In addition, the United States must have sufficient gold reserves to fulfill its obligation to exchange 35 ounce of gold for $1.If the United States loses too much gold reserves and has insufficient reserves, it will be difficult to fulfill its exchange obligations, and it will be unable to carry out market operations and stabilize the price of gold. The exchange rate of the US dollar will drop, and the foundation of the international monetary system will be shaken.The Bretton Woods system also stipulates that the floating range of the exchange rate must be kept within [-]%, which leads to the lack of flexibility of the exchange rate and limits the adjustment effect of the exchange rate on the balance of payments.With the development of history, the disadvantages of the Bretton Woods system are gradually exposed.

The seventh dollar crisis broke out in July 1971, and the Nixon administration announced the implementation of the "New Economic Policy" on August 7, which stopped fulfilling the obligation of foreign governments or central banks to exchange U.S. dollars for gold.This means that the dollar is decoupled from gold, and one of the two pillars supporting the international monetary system has collapsed. In March 8, there was another wave of selling dollars and snapping up gold and marks in Western Europe. On March 15, the European Community held a meeting in Paris and reached an agreement that the Federal Republic of Germany, France and other countries implemented "joint floating" on the US dollar and fixed exchange rates among themselves.

So far, another pillar supporting the international monetary system after the war, that is, the fixed exchange rate system has also completely collapsed.This heralded the final disintegration of the Bretton Woods system.With the process of global economic integration, the dominance of the US dollar no longer exists.The world is developing towards multi-polarization, and the international monetary system will develop toward the trend of free floating exchange rates, diversified international reserves, financial liberalization, and internationalization.The single currency system is increasingly difficult to meet the needs of rapid economic development, which is the root cause of the collapse of the Bretton Woods system.

[links to related words]

Bistandard means that a country stipulates gold and silver as the standard currency at the same time.Under the bimetallic standard, gold and silver can be bought and sold freely, minted and melted freely, exported and imported freely, just like under the gold standard or silver standard.

Paper currency standard is also called "free standard".A system in which paper money issued by the state is used as the standard currency.Its characteristic is that the state does not stipulate the gold content of banknotes, nor does it allow banknotes to be exchanged for gold (silver). Banknotes are circulated as the main currency and have unlimited legal repayment capacity.

(End of this chapter)