The Monetary History of Gold

A Documentary History, 1660-1999

Mark Duckenfield

• Publisher: Routledge
• Year: 2016
• eBook ISBN: 9781315476117
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

This title presents a collection of documents relating to the monetary history of gold from the 17th century up to the present, covering specifically the rise of the gold standard, its heyday, and the period following.

Section III.

After the Gold Standard, 1931–1999

Section III.
After the Gold Standard, 1931–1999

The return to the gold standard after the First World War was short-lived. The façade of the pre-war monetary system was reconstructed from the wreckage of the war, but it was a weak structure that lacked many of the institutional features that supported its predecessor. The stability of the traditional gold standard had depended upon the existence of a set of domestic political and economic institutions that limited the political participation of the working class and prevented governments from implementing counter-cyclical fiscal and monetary policies. Under the gold standard, the domestic economy bore the brunt of the costs of adjustment as exchange rates were fixed among gold standard participants. As a result, domestic prices and workers’ wages all needed to be reduced during an economic downturn in order to bring the national economy back into equilibrium. Under this system, higher unemployment served a social purpose in pushing wages downward. Governments concentrated on running balanced budgets and pursued fiscal policies that limited the role of the state in the economy.¹

The extension of the franchise and the subsequent movement towards universal suffrage brought an end to this system of political economy, although it took until the 1930s before the gold standard ultimately collapsed. Working class political parties – in particular, socialist parties – challenged the prevailing political system to provide social benefits for workers through expanded government support and programmes of income redistribution. The expanded electorates increasingly came to hold governments and politicians responsible for the growth of the economy and the alleviation of unemployment. This responsibility extended not simply to newer parties advocating revisions in national economic policies so that they reflected popular preferences, but also to those that resisted making changes to long-standing strategies.²

In this new era, the functioning of the gold standard and the decentralised system of international monetary policy suddenly became objects of domestic political debate in ways that they had not been in the past. The re-introduction of the gold standard in Britain in 1925 (modified into a gold bullion standard without the free minting of gold) led to heightened unemployment and triggered the country’s first General Strike. Although the strike failed, it revealed the extent of labour disaffection with the status quo and the willingness of unions to hold the government responsible for economic outcomes. Torn apart by the war and re-ordered to meet new social realities, the political and economic institutions which supported the gold standard were ill-prepared to withstand political demands that burst forth during the Great Depression.

The worldwide economic depression that began in 1929 exacerbated existing domestic social tensions across the world as unemployment rose and output dropped. Social unrest led to calls for additional government assistance and the prospect of substantial budget deficits drove many debtor countries off the gold standard. The crisis affected countries at the core of the international financial system as well. Britain became the first major creditor country to be forced off gold on 21 September 1931. Although it pledged a return to the gold standard at an undesignated future date and other central banks made resurrection of the gold standard the centrepiece of international financial orthodoxy, the list of countries abandoning the gold standard grew throughout the 1930s. Shortly after his inauguration as President of the United States in 1933, Franklin Roosevelt issued a series of Executive Orders banning the exportation of gold and silver from the United States and effectively nationalised private gold holdings in the United States, and ultimately devalued the dollar by 40 per cent. When France and Switzerland suspended gold convertibility in 1936, there were no longer any major financial powers in the world adhering to the gold standard.

That same year, the Tripartite Agreement between Britain, France and the United States (and several other European powers) signalled the re-establishment of international monetary cooperation in the midst of worldwide economic chaos. The Second World War briefly interrupted attempts at further monetary cooperation. While the war threw the international financial and monetary systems back into chaos, it also provided an impetus for deeper integration for the Western economies, particularly those of the United States and the United Kingdom. The two countries promoted efforts to provide a stable framework for international trade and monetary relations in the post-war world. Fuelled in large measure by a desire to avoid a repetition of the economic dislocations of the 1930s and the subsequent political radicalisation that had contributed to the rise of fascism in Europe, the Allied powers negotiated the Bretton Woods agreement in order to establish a system of semi-fixed exchange rates organised under the auspices of the newly-created International Monetary Fund (IMF). Unlike the pre-war gold standard, the Bretton Woods System allowed for the alteration of any currency’s par value in the event of a ‘fundamental disequilibrium’ in its external accounts. The post-war international financial system was centred around gold and the US dollar, which itself was linked to gold at a rate of $35.00 per troy ounce.

Along with the General Agreement on Tariffs and Trade, the Bretton Woods System provided the international economic component to the Western post-war system. Like the nineteenth century system that preceded it, this system was entrenched in a robust series of economic and political institutions at both the national and international level. A free market economy operating through the insulation of the Keynesian welfare state provided the domestic economic structures necessary to offer profitable economic activity while at the same time providing some degree of social protection for those disadvantaged by the vagaries of the marketplace. Domestic political institutions reinforced the welfare state and offered political outlets for popular concerns. At the international level, the Cold War divide and the North Atlantic Treaty Organisation (NATO) provided the political and military security within which the economic system could safely function.

The dollar’s central position under Bretton Woods reflected the United States’ position as the principal economic and financial power in the post-war era and the possessor of three-quarters of the world’s gold supplies. For the international economy to operate efficiently, there needed to be enough liquidity to facilitate trade without fear of a sudden monetary contraction.¹ The finite quantity of gold in the world and memories of the liquidity squeeze of the 1920s and 1930s meant that gold was an unattractive contender for such a role. On the other hand, the dollar was an attractive candidate as an international reserve currency and the United States was taking responsibility for ensuring that dollars were readily available in the system. Under Bretton Woods, gold reserves remained locked in central banks – although they exchanged gold to settle accounts between themselves – and the dollar became the international reserve currency of choice. The United States came to possess additional monetary privileges and responsibilities that other countries did not possess.

As many other countries had use of the dollar for transactions not involving counterparts in the United States, the United States cou...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Acknowledgements
• Editorial Note
• Section I.: The Rise of the Gold Standard, 1660–1819
• Section II.: The Heyday of the Gold Standard, 1820–1930
• Section III.: After the Gold Standard, 1931–1999
• Appendix: Second Central Bank Gold Agreement: Joint Statement on Gold (8 March 2004)
• Index