Presentation on Dollar Based Gold Standard By Group-09

Evolution of the International Monetary System – Classical Gold Standard –Interwar Period –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: 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: 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: 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: German mark British pound French franc U.S. dollar Gold Pegged at $35/oz. Par Value

Bretton Woods System: 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 Members Cumulative lending: $407.4 billion Fiscal 2005 lending: $13.6 billion for 118 new operations in 37 countries The International Development Association Established 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 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 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 Members Total cases registered: 184 Fiscal 2004 cases registered: 25

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