In 1944 in Bretton Woods, New Hampshire, USA, a meeting of 44 countries was held in order to establish agreements and guidelines about the functioning of the world economy after the end of the Second World War. This was known as the “Bretton Woods agreements”, which sought to give a boost to the monetary economy and promote international trade, in order to provide economic stability and build trust, and at the same time, generate resources for those countries that were going through serious financial problems in their balance of payments.
Establishment of the dollar standard
One of the most important measures was the establishment of the dollar standard, as a global currency linked to gold, this means that the dollar became the reference currency for the rest of the currencies, and likewise, for each ounce of gold. A price of 35 dollars was set, in this way, the central banks could exchange gold for dollars or vice versa, through the Federal Reserve. This system worked during the 1950s since international markets showed a balance between supply and demand for dollars, there was a flow of dollars thanks to financial credits, direct investment and US imports.
This decade is characterized by the arrival of tensions, gold was acquired for speculative purposes, the intention of speculators was to sell gold when its price was above 35 dollars, and then buy it when those prices fell. In this way, there were important conversions of dollars for gold, which generated confidence problems. Likewise, the United States decreased its exports and began to import different products and services from abroad, which were paid with US dollars, which were backed by gold.
End of the gold standard
The gold standard was in force until its abolition in 1971. At the time of world inflation, due to the abundance of American dollars, dollars were converted into gold in a massive way, which caused the vacuum of gold in the coffers of the Reserve Federal, distrust of the dollar was increasing and the Bretton Woods system seemed to be on the brink of its end. The US economy already had a trade deficit, coupled with that, the Vietnam War contributed to the emptying of American reserves, this made it imperative and urgent, the duration of the Bretton Woods agreements, and that is when in the year 1971, with Richard Nixon being the president of the United States when it was decided to take a series of measures in this regard, there were three measures that were taken at that time:
- Suspend the convertibility of the dollar’s gold.
- Establishment of a 10% tariff on imports.
- A decrease in external aid of 10%.
This meant the end of the fixed system that had established the price of an ounce of gold at 35 dollars, and the North American currency was not backed by gold and became Fiat money, which means that the dollar was now backed By the issuing authority, there was no longer any metal to back dollar issues. A new international monetary system had arrived, the dollar was no longer tied to gold, and currencies began to fluctuate freely in the markets, under the supervision of each Central Bank, which continues to act to this day, as the monetary authority.
Disadvantages of the new system
One of the “advantages” of this monetary system is that it allows you to create Fiat money freely (by various methods) in order to “stimulate” the economy. However, this system has several disadvantages, the first is that the system is only sustained by debt and that the constant creation of money “without support” causes the dollar to lose more and more its value (which hurts savers and benefits debtors), the second major disadvantage is the poor transparency of the central bank when making these types of decisions, there is also the risk that when large amounts of Fiat money are issued, the country could fall into hyperinflation and end up bankrupt, as has already been seen in several countries (throughout history) where money has been printed without any type of control.
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