An Article Review on: the Borrower of Last Resort: International Adjustment and Liquidity in Historical Perspective* Ramaa Vasudevan

The Gold Standard was the framework by which the value of cash was characterized in terms of gold, for which the money could be traded. The Gold Standard ended up being deserted in the Depression of the 1930s. Friedman felt that,“The gold standard is not feasible because the mythology and beliefs required to make it effective do not exist. This conclusion is supported not only by the general historical evidence referred to but also by the specific experience of the United States” ( “The Gold Standard:Please Stop”).Economists who contradict the Gold Standard may perceive what must be accomplished with a specific end goal to make a centrally controlled paper standard better than a decentralized Gold Standard. Milton Friedman poses the key question: "How can we establish a monetary system that is stable, free from irresponsible tinkering, and

With the onset of the war, the stability of the relationship between Britain, France, and Germany – which the Gold Standard was dependent on – crippled (lecture, 10/13). During the interwar period, 1914-1945, the lack of coordination between economies led to a liquidity shortage while the nations held a floating exchange rate. The interwar period saw a breakdown in international monetary coordination – proving that a floating economy was doomed for failure (FLB 264). Outside of the lack of international coordination, the Gold Standard had other downfalls leading to its demise. For example, national governments had no authority to stimulate their country’s economies in times of need. Moreover, the fixed economy limits foreign trade, hurting the country’s industries (lecture,

Along with the stocks and bonds, there was also a high demand from foreigners wanting American goods. This occurred because the deflation from the United Sates made it so appealing to foreigners (Romer). On the other hand, because there was such a low income from Americans it reduced their demand for foreign products (Romer). Unfortunately other countries were trying to maintain an international gold standard in order to continue to meet the monetary contraction that was occurring in the United States (Romer). Sadly, this resulted in the deterioration of output and prices throughout countries all over the world. This downturn of other countries started looking like the one occurring in the United States (Romer). Banking panics along with financial crisis started occurring in other countries around the world, not just in the United Sates (Richardson, September 2007). By forcing countries to deflate, the gold standard reduced the value of bank’s collateral and made them more vulnerable to bank runs (Romer). Due to the overwhelming panics in banks and other financial market disruptions, countries globally experienced a tremendous depression in output and prices (Paul Evans).

After World War II, the Bretton Woods Agreement established the gold standard and two support institutions called the International Monetary Fund (IMF) and the World Bank. This would lead to a shift, away from the gold standard, to more relaxed systems. The idea of currency purely backed by gold was slowly being shifted to a trust based currency. These institutions purpose was to regulate the economies by injecting or taking money in a process called sterilization. Sterilization is to protect certain countries from a going bankrupt. If a country goes bankrupt, it chain a chain reaction of bankruptcies. So, in order to maintain balance, currencies need to be stable enough, so that it can be in debt without having to declare bankruptcy. The idea is

Ever since the Bretton Woods agreement in 1944, the U.S dollar became the world’s currency. Bretton Woods agreement was basically an agreement on which every country currency would be back up by the dollar, due to the fact that after WWII United States was the only one with the biggest gold reserve in the world. Although it was proposed as a good idea it had its flaws for one even though it help the U.S and other countries there was simply not enough gold to continue backing up the dollar value. Which lead to President Richard Nixon to abolish the gold standard economy. His abolish of a gold standard economy lead to a new proposal on which the dollar would be back by.

“A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation.” – Ross Perot. The words of the 1992 Presidential candidate still ring true today, and in fact they have since the abolition of the gold standard in 1971 by President Nixon. Ever since that warm August day the United States has been on a death plunge into immaculate amounts of debt. However, by the establishment of the silver standard in the way I will explain to you today, makes it clear that action on such a policy must be taken.

The primitive monetary instruments had a profoundly dynamic assistant nature, had no inborn quality. Their operation did not suggest the utilization of any particular item, but rather just the reference to a theoretical money related unit. Regardless of the possibility that the unique money related unit were symbolized by a given particular stock, this stock never took an interest in the operations, since what was implied was to make a conceptual reference to its worth, and not to trade different merchandise for it. Hence, currency was not, subsequently, created by a flash of brilliance, but rather originated from a need, and its development has reflected, at every time, the readiness of man to orchestrate its currency features to the reality of its economy. Perhaps even more importantly, invention of currency was the mother step in a new monetary system that has led to the birth of electronic banking and credit cards. To infer, pretty much as human advancement from viciousness to development has relied on upon the invention of currency, future advancement will rely on another definition and utilization of

In 1974 the decline of the west was already predictable and U.S president Nixon made a deal with Saudi Arabia. In return for buying oil in dollars, the U.S would guarantee military security and the petrodollar was born. This guaranteed a steady supply of income for the U.S, as the Federal Reserve is a conglomeration of private companies taking a percentage of every dollar used. Rivero’s fascinating insight into the how the dollar plays a key role in U.S foreign policy explains the reasons behind many U.S actions today.

This made the policy fine until WW 1 when the gold standard was torn up in 1914 because countries needed to print money to fight World War I. When World War I was over and the world entered the early 1920s, countries wanted to go back to the gold standard but they didn’t quite know how to do it. Before World War I started with parity, meaning there was a certain amount of gold and a certain amount of paper money backed by gold. Then, the paper money supply was doubled. That left only two choices if countries wanted to go back to a gold standard. They could’ve doubled the price of gold — basically cut the value of their currency in half or they could’ve cut the money supply in half. They could’ve done either one but they had to get to the parity

America at home: By the end of 1945, war induced prosperity launched the United States into an era of unprecedented economic growth. Pent up demand after years of wartime mobilization made Americans eager to spend. Over the next two years, the GDP tripled, benefiting a wider segment of society than anyone would have dreamed possible in the dark days of the Depression. American global supremacy rested in part on economic institutions created at a United Nations conference at Bretton Woods, New Hampshire, in July 1944. The International Bank for Reconstruction and Development (known commonly as the World Bank) provided private loans for the reconstruction of war-torn Europe as well as for the development of Third World countries. A second institution, the International Monetary Fund (IMF), was set up to stabilize the value of currencies and provide a predictable monetary environment for trade, with the U.S dollar serving as the benchmark for other currencies. The United States dominated the World Bank and the IMF because it contributed the most capital and the strongest currency. In 1947, multinational trade negotiations resulted in the General Agreement on Tariffs and Trade (GATT), which led to the establishment of an international body to oversee trade rules and practices. The

At the end of World War Two, the Bretton Woods system was established for world currencies. This system involved countries fixing their currencies to the US Dollar, which in turn was tied to the value of gold at a fixed exchange rate of $35 per ounce. As this was a fixed exchange rate system it effectively forced countries to pursue a certain monetary policy, in order to keep their currency pegged to the Dollar and in turn the value of gold.

With the continuous decline of the United States economy, it leaves us to wonder if there is anything that can be done to stop this degradation. There are several economic policies that can have different effects towards the stability of our countries currency, but one that stands out is the issue of returning to a Gold Standard. Would this be the best course of action, or would it further the problems we currently have, or would it even be better to look at an alternative solution to moor our currency? Understanding these solutions will greatly benefit those of us who live in the United States and can even have a large effect on the world. Those who understand these issues have the knowledge needed to help us make a decision on what would be best for our country’s economy.

To understand how the dollar secures American hegemony requires some review of history. After the Great Depression and World War II, the economic structures of the Old World powers were destroyed and in dire need of reconstruction. Only America remained in one piece, a situation that allowed it to decide how the new world order would work. As World War II was ending, representatives from the Allied nations were gathered in Bretton-Woods, New Hampshire, where negotiations for this

One of the characteristics of gold standard defined by Temin is that the adjustment mechanism for a trade deficit country was deflation rather than devaluation, that is, a change in domestic prices instead of a change in the exchange rate. In the event of a balance-of-payment deficit, countries on the gold standard could not devalue their currencies or expand the money supply to stimulate domestic demand, because by doing so would push up good prices, encourage more gold exports, and weaken the currency. Instead, they could only tighten monetary conditions with the goal of reducing domestic prices and costs until international balance was restored. “Critical to this process was the effort to reduce wages, the largest element in costs.” That is to say, the gold standard system must be maintained at the expense of the welfare of ordinary people, which they must either experienced wages fall or unemployment. This mechanism worked well to facilitate trade and exchange before the First World War, the reason,

Almost all of the countries involved in the conflict were obliged to reduce the gold content in their coins with reference to the period before the conflict. The exceptions were the United States, which returned to the Gold Standard in June of 1919 and England, which returned to the Gold Standard in April of 1925. While the U.S. took the post –war position as the world 's largest creditor and entered a period of unprecedented prosperity, England faced major financial difficulties, with a decision to maintain an overvalued exchange rate, for political reasons rather than economical reasons.