Presentation

on

Dollar Based Gold Standard

By

Group-09

Evolution of the International Monetary System

• 1875-1914– Classical Gold Standard

• 1915-1944– Interwar Period

• 1945-1972 – Bretton Woods System

• 1973-Present– The Flexible Exchange Rate Regime

The Gold Standard• Gold standard – a monetary standard

under which the basic currency unit is equal to, and can be exchanged for, a specific amount of gold.

• People still used the same types of currency (greenbacks, silver certificates, etc) as they did before, but now they could exchange them for gold at the Treasury.

• In 1900, US Congress passed the Gold Standard Act which fixed the price of gold at $20.67 per ounce.

– The gold standard had its origin in the use of gold coins as a medium of exchange, unit of account, and store of value.

– The Resumption Act (1819) marks the first adoption of a true gold standard.

– The U.S. Gold Standard Act of 1900 institutionalized the dollar-gold link.

Origins of the Gold Standard

Classical Gold Standard: 1875-1914

• The exchange rate between two country’s currencies would be determined by their relative gold contents.

• If the dollar is pegged to gold at U.S.$30 = 1 ounce of gold, and the British pound is pegged to gold at £6 = 1 ounce of gold, then, $30= £6, or $5= £1

The U.S. & Gold

• Political Failure– When banks began to fail in the early 1930’s, people

began to cash in their U.S. paper currency for gold. So did foreign countries that had U.S. currency.

– With the reality of the U.S. having no gold, the government quit redeeming paper currency for gold.

– On August 28, 1933, FDR declared a national emergency which required all citizens with more than $100 of gold or gold certificates to file a disclosure form with the government.

The U.S. & Gold

• In 1934, the U.S. government fixed the price of gold at $35 per ounce.

• The U.S. then confiscated all the privately owned gold and the U.S. quit exchanging fiat currency for gold.

• This in effect took the U.S. off the gold standard.

• The U.S. continued to fix the price of gold at $35 per ounce until 1971.

Interwar Period: 1915-1944

• Exchange rates fluctuated as countries widely used “predatory” depreciations of their currencies as a means of gaining advantage in exporting .

• The result for international trade and investment was profoundly detrimental.

Bretton Woods System: 1945-1972

• Named for a 1944 meeting of 44 nations at Bretton Woods, New Hampshire.

• The purpose was to design a postwar international monetary system.

• The goal was exchange rate stability without the gold standard.

• The result was the creation of the IMF, World Bank, and establishment of $ based gold standard.

Bretton Woods System

• The International Monetary Fund was created to:– Help countries defend their currencies against cyclical,

seasonal, or random occurrences

– Assist countries having structural trade problems if they promise to take adequate steps to correct these problems

• The International Bank for Reconstruction and Development (World Bank) helped fund post-war reconstruction and has since then supported general economic development.

Bretton Woods System: 1945-1972

German markBritish

poundFrench franc

U.S. dollar

Gold

Pegged at $35/oz.

Par Value

Par ValuePar

Value

Bretton Woods System: 1945-1972

• Under the Bretton Woods system, the U.S. dollar was pegged to gold at $35 per ounce and other currencies were pegged to the U.S. dollar.

• Each country was responsible for maintaining its exchange rate within ±1% of the adopted par value by buying or selling foreign reserves as necessary.

• The Bretton Woods system was a dollar-based gold exchange standard.

Why did Bretton Woods System Fail?

• In 1960, US ran large amount of BOP deficit. By the late 1060s, foreign holdings of $ exceeded the gold reserve at the Fed.

• In Aug. 1970, Nixon declared the end of Bretton Woods fixed exchange rate system.

The International Bank for Reconstruction and Development

Established 1945 184 Members

Cumulative lending: $407.4 billion

Fiscal 2005 lending: $13.6 billion for 118 new operations in 37 countries

The International Development Association

Established 1960 165 Members

Cumulative commitments: $161 billion (includes credits, grants, and guarantees)

Fiscal 2005 commitments: $8.7 billion 160 new operations in 66 countries

The International Finance Corporation

Established 1956 178 Members

Committed portfolio: $24.6 billion (includes $5.3 billion in syndicated loans)

Fiscal 2005 commitments: $5.4 billion for 236 projects in 67 countries

The Multilateral Investment Guarantee Agency

Established 1988 165 Members

Cumulative guarantees issued: $14.7 billion (includes funds leveraged through the Cooperative Underwriting Program)

Fiscal 2005 guarantees issued: $1.2 billion

The International Centre for Settlement of Investment Disputes

Established 1966 142 Members

Total cases registered: 184

Fiscal 2004 cases registered: 25

Thank You