50 years since the end of the Bretton Woods gold standard

50 years have passed since the end of the gold standard designed at the Bretton Woods Conference, a system that forced the countries of the International Monetary Fund (IMF) to maintain a fixed exchange rate with respect to the dollar and the US central bank to support its currency with the gold.

On August 15, 1971, the then president of the United States, Richard Nixon, suspended this monetary regime that was born in 1945 at the meeting that the World War II allies held at the Mount Washington Hotel in Bretton Woods (New Hampshire). , USA).

During those 26 years, each member country of the IMF was obliged to maintain a fixed exchange rate (although some flexibility was allowed by prior agreement) against the dollar, because the US currency was the only one that could be exchanged for gold.

Not a viable system at present

Experts consider that the gold standard is not a viable system today, since the economy cannot depend on a finite and scarce asset that does not take into account the needs of society.

Miguel Otero Iglesias, a researcher at the Elcano Royal Institute, points out that the Vietnam War and social spending programs, which drastically increased public spending, are behind the US decision to stop pegging its currency to gold.

The Elcano expert points to other reasons, such as the US current account deficit, the creation of a private gold market and the appearance of the euro-dollar markets.

“Euro-dollar markets were a type of unregulated market that attracted US capital to the City of London and led to a drain on deposits to the UK (as London banks offered a higher deposit rate higher than that of North American entities), which generated great pressure on the dollar,” he explains.

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In 1965, France showed the vulnerability of the gold standard. President Charles de Gaulle went to the Fed and turned 150 million dollars that the French State had in its reserves into gold, which caused the monetary agreement between the great powers to break in 1971.

“That’s when Nixon decides to disassociate himself from the gold standard, although it will not be until 1973 when currencies are allowed to float freely in the foreign exchange markets,” explains Otero Iglesias.

From that moment, currencies do not have to be anchored to a fixed exchange rate and central banks must not link their policy to maintaining a specific parity.

José María Serrano Sanz, professor of economics at the University of Zaragoza, believes that the current monetary system has many advantages, since it is guided by a set of economic indicators that influence the economy, while the gold standard subjected the economy to a metal.

new geopolitical order

For Instituto de Empresa professor Jaime García-Legaz, the Bretton Woods system would not be feasible now, since the US does not have enough gold reserves to anchor its national currency to this precious metal.

In addition, he believes that the current geopolitical order would not allow it. “China has the aspiration to become a hegemonic power in the world, which makes it difficult to adopt the dollar as a world reserve currency,” García-Legaz underlines.

The monetary system of the future

Otero Iglesias considers that there is a problem in the current economic system, since credit is generated through commercial banks, which has generated bubbles in the last thirty years, including the one that gave rise to the last financial crisis.

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“An alternative would be for money to be issued and deposited in central banks and for commercial banks to focus solely on managing the investments of companies and individuals,” he says.

On the future design of the international monetary system, the economist José Carlos Díez believes that the revolution will come from the hand of tokenization (representation of an asset within a chain of blocks).

“There will be digital money but it will coexist with analog money. The use of money and the need for the financial system to transform savings into investment will continue to exist,” he says.

García-Legaz agrees, who believes that the arrival of cryptocurrencies has made central banks accelerate their plans to design public digital currencies (CBDC).

For Otero Iglesias, it is logical that in the digital age public money has a digital representation. “The characteristics of sovereign digital money is what is being discussed now. Political power has always been the one that has established the unit of account of money, that is why bitcoin will never be money, that is something that I do not think will change”, judgment.

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