The Rise and Fall of the US Gold Standard:
History of US currency
speculation during the Cold War
All of the various doctrines and historical
events, mentioned in this paper happened in the form of deterrence,
containment, commitment to intervention and have been used
to define how various government policies and attitudes took
the form of ideological, historical confrontation. However,
the maintenance of the balance of power also accorded the
role of the 4th pillar of American foreign policy the facilitations
of the international functions of liberal capitalism itself.
The attempts at US management of the international monetary
system can be classified into 5 periods. The first economic
period was the period between 1945-47, representing the original
Bretton Woods System. The second period could be described
as US multilateral management of the international economy,
comprising the period of 1947-1960. The Third period a period
of crisis, could be descried as the multilateral management
of the international economy under US control. The Fourth
Period from 1971-1985 could be described as the post-Bretton
Woods System. The final period 1985 - present could be described
as a system of multilateral and regional management by emerging
core-producing states.
Before and during the first period, International
organizations that managed monetary policy relied on a system
of fixed exchange rates. This was due to New Deal Keynesian
economic theory stressing the need for free convertibility
of currencies as well as his other general ideas on how
to manage free trade. The IMF emerged as the institution to
manage this and it maintained a weighted system, gold on
deposit and gold fixed to the value of the US dollar.
The principle of this system was that who ever had the largest
gold reserves controlled IMF policy. The IMF provided loans
for short-term liquidity in the Third World, and as of yet
it was not prepared to implement total re-development in the
post war-politically unstable third world. Essentially, this
system provided loans only for short-term liquidity purposes
when these various recipient countries were encountering trade
deficits when the US was still a manufacturing economy. However,
there was no provision in the IMF for the creation of new
gold reserves, the rate of exchange being maintained on the
existing supply of bullion. IMF also didn't have much individual
power to enforce its loan terms. Thus, the World Bank was
created to provide plans for long term development and economic
stability of Germany and Japan fully resuscitated into the
international system. This would prevent these countries from
adopting historical imperial ambitions by developing their
economic systems as interdependant with the economies of the
West. Also these countries could in turn provide economic
stability for Europe in Asia as a whole which would create
an economic containment of Soviet Communisim.
Between 1945 and 1947 the US pressed for immediate
implementation of the IMF and World Bank. The US also loaned
money to England to enlist their support for the new international
monetary system. However, by 1947 the IMF and the international
economic system was on the verge of collapse. The reason was
that the source of the loans were dependant upon US bond sales
that suddenly americans had begun to cash in with the end
of the War. Containment of the new economic system led the
US to unilaterally manage the economic system by directly
placing the US economy as the key supplier of foreign aid.
This was how the economic surplus brought on by the war effort
and the investing of private capital in Europe-albeit the
Marshall plan came into effect. Also from this period and
ending in 1947, gold and the pound were the traditional fixed
currencies. From 1947-1971 the dollar replaced the pound and
became directly linked to the gold standard at 33 dollars
an ounce. Dollars in time were to be viewed more economically
viable in application to monetary policy then gold as such
gold as a commodity came to be devalued.
Now there was a huge shortage of dollars in
Europe. Europeans had been buying American products to rebuild
their economies however, they had no capacity for facilitating
export trade. The Marshall plan moved to an infusion of American
capital and cash into European economies. Between 1948-52
the US supplied 17 billion in grants to Europe alone.
The US had become central banker of the world. The IMF was
now in position to supply short term balance of payments to
japan for example by tolerating trade protectionisim imposed
by Japanese restrictions on imports. This allowed countries
to limit convertibility of currencies in name of getting those
countries involved in the international system of debt relief.
 By
1960 there were serious problems with this system. For the
Dollar to function as the international currency it had to
have international confidence. The dollar still had to have
the option for its value to be redeamed in gold bullion. Meanwhile
declining confidence in the US dollar contributed to the massive
outflow of US dollars into other countries. nThis problem
of containing the US control of the dollar relative to its
value in gold was also met by the Soviet's seeking to override
the US's system of implementing economic hazard control. In
the late 1950's there were large gold reserves in the US and
large amounts of US currency overseas. Hence this created
a currency shortage in the US. Also Europeans had claims to
a large amount of the gold supply on hand. By 1959 US gold
reserves had dwindled to 20 billion dollars. By 1960 Europeans
had outstanding claims on US reserves in excess of 25 billion
dollars. Speculators made a run on the Dollar. However,
the US forced Europe to continue to back the dollar. However,
the need had arisen for a system of collective multilateral
economic management. The IMF and WB stepped in as the clearing
house for short and long term loans for national development
of third world countries. However, since the WB was under
funded a system emerged in which the economic loans from the
IMF were contingent on these countries buying US goods under
their established economic recovery plan.
Thus 1960 was the year that the US strove to
search for hegemonic order in perpetuating the the dollar
as the international standard of monetary exchange. The chief
institution behind this effort was the International Settlements
office and it was charged with maintining and forestalling
european speculator claims on the US dollar backed by the
expansion of the US economy. The International Settlements
Office had managed US currency problems since the 1930's and
immediately set out to limit the number of claims on the dollar.
Essentially this emerged as a banking system above the US
central banking system and it guranteed the value of the dollar.
ISO set up a private banking system comprised of various consortiums
composed of 10 banking finance ministers from the 10 most
industrialized countries in addition to the US, all playing
a leading role. ISO immediately began to issue bonds to cover
claims on the US dollar-gold standard.
In 1968 the IMF
established a system of monetary 'special drawing rights',
SDR, among the G10 nations which acted in lien of promissory
notes on the US dollar and other currencies. The ideal of
this new monetary policy was to create a system in which dollar
liquidity and free cash flows could be maintained in international
trade. SDR continued this currency system establishing the
modern process for currency convertibility, liquidity, and
adjustment. The G10 excercised a policy of Economic restraint
in regards to this international monetary system by preventing
countries with tradedeficits from cashing out their international
credit reserves, i.e., US dollars= international currency,
supplying capital for 3rd world imports, which in turn generated
and european US supported export credits. The SDR ranking
system established its hiearchical right of claims as based
on those nations with the largest gold reserves. The US still
had the largest gold reserves and as such they excercised
SDR to their comparitive advantage. The US by creating new
assets was able to forestall foreclosure on the dollar and
maintain overall US appeareance of financial credibility in
the international system.
This systemic overhaul of the international
economic community marked the development of monetary independence
and the rise of Transnational Banks. Money came to be viewed
as a liquid asset. In 1965 foreign banks with overseas branches
held assets in excess of 100 billion dollars. However, there
were still problems in terms of liquidity and European claims
on the US dollar. Between 1968-1971 the international monetary
system became paralyzed. In early 1970 European claims
on the US dollar rose to 1 trillon dollars. The US still
continued to promote the dollar as the international currency
standard of exchange.
The reason for the decline of the US dollar
was the fact that the US was spending far beyond its means.
Under the LBJ administration the US strove to fight three
wars, the Cold War, The Vietnam War, and the War on Poverty.
We had the economic power to win two out of three of these
wars, but America moved ahead in charisteristic gung ho fashion.
Inevitably, The US was forced to devalue its currency to fund
all three programs by printing out more US dollars in effect
to devalue the price of gold. Keynes theories of deficit spending
for economic growth provided the US with two options. One
private banks could carry the US deficit and float loans.
The other option was to have the US devalue its currency.
However, the intial US response dictated that the West Germans
quid pro quo for American nuclear defense against the USSR,
to back the US dollar. The US essentially exported its deficit
momentarily to Germany. The Germans owed their industrial
recovery to the US and so the dollar's demise was momentarily
stalled. Since the US dollar was the international currency
of exchange European futures were tied to the rise and fall
of American dollars.
The new monetary system called for all currencies
to maintain parity of + or - 1 with the US Dollar. If the
world currencies failed to balance in this manner the entire
international system would have collapsed. However, Europe
at this time was not happy in being saddled with US currency
debt, and being forced to back the US imposed international
exchange value. Essentially, the US during the 1960's attempted
to exercise unilateral monetary policy through the exercise
of cold war containment, and attempted to export the cost
of the Vietnam War to Europe. The outcome of these policies
only stalled the realities of economic contrition. By 1971
US gold stock declined by 10 billion dollars. Foreign Banks
at the same time held 80 billion dollars or 8 times the supply
of US gold reserves. President Nixon then decided to de-link
the dollar from the gold standard and ended the system of
fixed monetary currency convertibility. In the same year as
mentioned above the US implemented the Smithsonian
Agreement which provided the monetary controls necessary
to prevent the freefall of the Dollar potentially resultant
from European credit claims and currency speculators. This
agreement provided for a 10 percent devaluation of US currency
as well.
With the end of the Bretton Woods system,
Nixon was able to proceed with his Vietnamization program
of gradual troop withdrawals from Vietnam, and yet he still
attempted increase saturation bombing sorties as an attempt
to leverage the North Vietnamese to negotiate at the diplomat
table. By 1972 and 1973 after successive invasions of Laos
and Cambodia, Nixon facing mounting anti war protest on the
Domestic front, along with skyrocketing currency inflation
brought on by the OPEC Embargo, was forced to end the
US commitment to the war in Vietnam. He would later be impeached
in 1974. --source: Professor Dario Caloss,
UCSC --
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Nixon Through Reagan
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By
1960 there were serious problems with this system. For the
Dollar to function as the international currency it had to
have international confidence. The dollar still had to have
the option for its value to be redeamed in gold bullion. Meanwhile
declining confidence in the US dollar contributed to the massive
outflow of US dollars into other countries. nThis problem
of containing the US control of the dollar relative to its
value in gold was also met by the Soviet's seeking to override
the US's system of implementing economic hazard control. In
the late 1950's there were large gold reserves in the US and
large amounts of US currency overseas. Hence this created
a currency shortage in the US. Also Europeans had claims to
a large amount of the gold supply on hand. By 1959 US gold
reserves had dwindled to 20 billion dollars. By 1960 Europeans
had outstanding claims on US reserves in excess of 25 billion
dollars. Speculators made a run on the Dollar. However,
the US forced Europe to continue to back the dollar. However,
the need had arisen for a system of collective multilateral
economic management. The IMF and WB stepped in as the clearing
house for short and long term loans for national development
of third world countries. However, since the WB was under
funded a system emerged in which the economic loans from the
IMF were contingent on these countries buying US goods under
their established economic recovery plan.