Bretton Woods Agreement Between 1948 and 1954, the United States gave 16 Western European nations $17

billion in grants. Believing that former enemies Japan and Germany would provide markets for future U.S. exports, policies were enacted to encourage economic growth. During this period, the Cold War became increasingly worse as the arms race continued. The USSR had signed the Bretton Woods Agreement, but it refused to join or participate in the IMF. Thus, the proposed economic reforms turned into part of the struggle between capitalism and Communism on the world stage. It became increasingly difficult to maintain the peg of the U.S. dollar to $35-per-ounce gold. An open market in gold continued in London, and crises affected the going value of gold. The conflict between the fixed price of gold between central banks at $35 per ounce and open market value depended on the moment. During the Cuban missile crisis, for example, the open market value of gold was $40 per ounce. The mood among U.S. leaders began moving away from belief in the gold standard. President Lyndon B. Johnson argued in 1967 that: "The world supply of gold is insufficient to make the present system workable - particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth." By 1968, Johnson had enacted a series of measures designed to curtail the outflow of U.S. gold. Even so, on March 17, 1968, a run on gold closed the London Gold Pool permanently. By this time, it had become clear that maintaining the gold standard under the Bretton Woods configuration was no longer practical. Either the monetary system had to change or the gold standard itself would need to be revised. The Bretton Woods system collapsed, partially due to economic expansion in excess of the gold standard's funding abilities on the part of the United States and other member nations. However, the problems of currency systems not pegged to gold lead to economic problems far worse. Addison Wiggin The Daily Reckoning Source: http://www.dailyreckoning.com.au/bretton-woods-agreement/2006/11/29/ The design of the Bretton Woods System was that nations could only enforce gold convertibility on the anchor currencythe United States dollar. Gold convertibility enforcement was not required, but instead, allowed. Nations could forgo converting dollars to gold, and instead hold dollars. Rather than full convertibility, it provided a fixed price for sales between central banks. However, there was still an open gold market. For the Bretton Woods system to remain workable, it would either have to alter the peg of the dollar to gold, or it would have to maintain the free market price for gold near the $35 per ounce official price. The greater the gap between free market gold prices and central bank gold prices, the greater the temptation to deal with internal economic issues by buying gold at the Bretton Woods price and selling it on the open market. In 1960 Robert Triffin, Belgian American economist, noticed that holding dollars was more valuable than gold because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. What would later come to be known as Triffin's Dilemma was predicted when Triffin noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world's economic growth, and,

thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability.[1] The first effort was the creation of the London Gold Pool on November 1 of 1961 between eight nations. The theory behind the pool was that spikes in the free market price of gold, set by the morning gold fix in London, could be controlled by having a pool of gold to sell on the open market, that would then be recovered when the price of gold dropped. Gold's price spiked in response to events such as the Cuban Missile Crisis, and other smaller events, to as high as $40/ounce. The Kennedy administration drafted a radical change of the tax system to spur more production capacity and thus encourage exports. This culminated with the 1963 tax cut program, designed to maintain the $35 peg U.S. President Lyndon Baines Johnson was faced with a brutal choice, either institute protectionist measures, including travel taxes, export subsidies and slashing the budgetor accept the risk of a "run on gold" and the dollar. From Johnson's perspective: "The world supply of gold is insufficient to make the present system workableparticularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth."[2] He believed that the priorities of the United States were correct, and, although there were internal tensions in the Western alliance, that turning away from open trade would be more costly, economically and politically, than it was worth: "Our role of world leadership in a political and military sense is the only reason for our current embarrassment in an economic sense on the one hand and on the other the correction of the economic embarrassment under present monetary systems will result in an untenable position economically for our allies." All attempts to maintain the peg collapsed in November 1968, and a new policy program attempted to convert the Bretton Woods system into an enforcement mechanism of floating the gold peg, which would be set by either fiat policy or by a restriction to honor foreign accounts. The collapse of the gold pool and the refusal of the pool members to trade gold with private entitieson March 18, 1968 the Congress of the United States repealed the 25% requirement of gold backing of the dollar[3]as well as the US pledge to suspend gold sales to governments that trade in the private markets,[4] led to the expansion of the private markets for international gold trade, in which the price of gold rose much higher than the official dollar price.[5] [6] The US gold reserves continued to be depleted due to the actions of some nations, notably France,[6] who continued to build up their gold reserves. 1. ^ http://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm 2. ^ Francis J. Gavin, Gold, Dollars, and Power The Politics of International Monetary Relations, 19581971, The University of North Carolina Press (2003), ISBN 3. ^ United States Congress, Public Law 90-269, 1968-03-18 4. ^ Speech by Darryl R. Francis, President Federal Reserve Bank of St. Louis (1968-07-12). "The Balance of Payments, The Dollar, and Gold". p. 7. 5. ^ Larry Elliott , Dan Atkinson (2008). The Gods That Failed: How Blind Faith in Markets Has Cost Us Our Future. The Bodley Head Ltd. pp. 615, 7281. ISBN 1847920306. 6. ^ a b c Laurence Copeland. Exchange Rates and International Finance (4th ed.). Prentice Hall. pp. 1035. ISBN 0273-683063.