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Adopt a Gold-Backed Dollar? This is What Happened the Last Time We Tried

Bretton Woods system and its gold standard fell apart 45 years ago this month

by Ben Steil, Market Watch:

“The dollar and gold are synonymous,” Harry Dexter White, the architect of the Bretton Woods international monetary system, told Congress in 1945. “There is no likelihood that . . . the United States will, at any time, be faced with the difficulty of buying and selling gold at a fixed price freely.”

Under the Bretton Woods system, currencies were tied to the U.S. dollar at a fixed rate, and the dollar was in turn tied to gold GCZ6, -0.56% at $35 an ounce. Today there is much nostalgia about Bretton Woods — a belief that the quarter-century from 1946 to Aug. 15, 1971 (when the system collapsed) was a golden era of monetary stability. But the reality was very different.

Although the International Monetary Fund was inaugurated in 1946, the first nine European countries to meet the requirements of its Article VIII — that their currencies be freely convertible into dollars at a fixed rate — didn’t do so until 1961. And by then, the system was already coming under enormous strain, as the U.S. — contrary to White’s assurances — was losing gold reserves.

The fundamental problem was that the United States couldn’t simultaneously keep the world adequately supplied with dollars and sustain the large gold reserves required by its gold-convertibility commitment. The logic was laid bare by economist Robert Triffin in his now-famous 1960 congressional testimony. There were, he explained, “absurdities associated with the use of national currencies as international reserves.” It constituted a “‘built-in destabilizer’ in the world monetary system.” The European dollar-convertibility pledges, far from representing the final critical step into a new monetary era, “merely return[ed] the world to the unorganized and nationalistic gold exchange standard of the late 1920s.”

When the world accumulated dollars as reserves, rather than gold, it put the United States in an impossible position. Foreigners lent the excess dollars back to the U.S. This increased U.S. short-term liabilities, which implied the U.S. should boost its gold reserves to maintain its convertibility pledge. But here’s the rub: if it did so, the global dollar “shortage” persisted; if it didn’t, the U.S. ultimately wound up hopelessly trying to guarantee more and more dollars with less and less gold. This became known as “the Triffin dilemma.”

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5 comments to Adopt a Gold-Backed Dollar? This is What Happened the Last Time We Tried

  • Alex

    Central Bankers would never go back to gold. The whole idea of Veneian system is DEBT. Venetian bankers did it back then and they are doing it again. Their task is to grow DEBT indefinitely and to keep a minimal amount of dollars within the system so it would be impossible to ever repay the debts.

    • Ed_B

      Which is precisely why these scumbags HAVE to go! We can do just fine without them but we cannot do fine without a monetary system that is grounded in something real and not merely imagined. Whether or not that is gold or gold and silver or something else is another conversation.

      The entire reason for creating fiat currencies was so that governments could spend more wealth than they had. Need more money? Just print it! My, how seductive that must have been back in the day when gold was money and one could not “just print it” when needed. No, countries back then HAD to live within their means. If they did not have the gold, they could not do the spending.

      This also gave their citizens some control over government spending because even though gold was money, they also had paper gold certificates that were redeemable at any bank on demand.
      In good times, people tended to prefer paper money because it was more convenient to carry or send by mail, a $100 bill instead of 5 double eagle or similar gold coins. In bad times, people tended to prefer the safety of gold coins, withdrawing gold from the banks via exchange for their paper money. Because of this, the government had less access to gold and could not spend what they did not have.

      WW-I particularly brought this to a head because those involved in that conflict were well aware that it cost a lot to field an army large enough and long enough to defeat a well armed and equipped adversary. While they definitely wanted a war and fabricated just the excuse for it via the assassination of an Archduke that no one particularly liked, they had no idea how they were going to pay for it. Enter… the bankers with tales of just how to do all this, for a fee, of course. And the rest, as is said, is history.

      The bad news for fiat currency is that it is not a sustainable system and that which is not sustainable WILL end. My guess is that when it does end, it will do so via a rather spectacular crash and burn that will be remembered for a VERY long time. This will be to the Great Depression as the Great Depression was to the Panic of 1907… which is to say MUCH worse. Got preps and PMs?

  • Eric

    Nice picture. What a worm. Ben Steil is director of international economics (whatever that is) at the CFR.

    Bretton Woods works great when you have the plunge protection team and the US Treasury’s Exchange Stabilization Fund which reports to NO ONE.

    Gold is going back into the system. And at much higher prices. Why? Because it works and has worked for 5000 years.

    http://www.silverdoctors.com/gold/gold-news/golden-jackass-jim-willie-china-bis-negotiating-global-contracts-settled-in-gold-prices/

    • aa

      Yeah Eric just from the title I guessed this article favored the dark side. I will not bother reading it since this dirt bag works for the CFR. Thanks for the heads up.

  • Eric

    In other news…

    First Majestic Silver hits another 52 week high of $19.15 while bitdrop barely holds above support of $580.

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