Group One Members:

Marc Jalen Relador

Fiona Redona

Crizalyn Macato

Classical Gold Standard

This spans the range from physical exchange of gold with no financial
intermediary institutions, to a system where gold-denominated bank liabilities are the
day-to-day medium of exchange. Even the Bretton Woods system, the international
monetary system set up following the Second World War, was a sort of gold
standard. In that system, many world currencies were pegged to the dollar, and the
dollar was pegged to gold, until the last vestiges of the system ended when
President Nixon closed the gold window in 1971.

The era of the international gold standard, which economists sometimes call
the classical gold standard, lasted from 1880 to 1914. This was the era of ascendant
economic liberalism. There was relatively free trade in goods, services, labor, and
capital. Combined with sound money in the form of the gold standard, the result was
unprecedented economic growth.

How did this monetary system work? Each country in the system defined its
domestic currency in terms of gold. The dollar was defined as so many ounces of
gold, as were the pound sterling, the franc, and so on. Because each national
currency represented so many ounces of gold, each of these countries was de facto
on the same monetary standard, impeded only by the transaction costs of
exchanging domestic currency for foreign currency. The quantity of money in each
domestic economy was governed not by executive fiat, but by impersonal economic
forces in the form of the price-specie-flow mechanism.

The classical gold standard broke down with the onset of the First World War.
Countries suspended the gold standard and resorted to inflationary finance. There
were attempts to restore the classical gold standard after the war, but these were
poorly implemented and half-hearted at best. By the time the First World War ended,
the era of monetary cosmopolitanism was at an end, and economic liberalism was
giving ground to progressivism and social democracy. The era of monetary
cosmopolitanism — and of liberal cosmopolitanism more generally — was relatively
brief. But its effect on human welfare was enormous, and it deserves to be
remembered and praised.

The Rise of the Gold Standard

 The gold standard is a monetary system in which paper money is freely
convertible into a fixed amount of gold. In other words, in such a monetary system,
gold backs the value of money. Between 1696 and 1812, the development and
formalization of the gold standard began as the introduction of paper money posed
some problems.

The U.S. Constitution in 1789 gave Congress the sole right to coin money and
the power to regulate its value. Creating a united national currency enabled the
standardization of a monetary system that had up until then consisted of circulating
foreign coin, mostly silver.

The Fall of the Gold Standard

With World War I, political alliances changed, international indebtedness

increased and government finances deteriorated. While the gold standard was not
suspended, it was in limbo during the war, demonstrating its inability to hold through
both good and bad times. This created a lack of confidence in the gold standard that
only exacerbated economic difficulties. It became increasingly apparent that the
world needed something more flexible on which to base its global economy.

At the same time, a desire to return to the idyllic years of the gold standard
remained strong among nations. As the gold supply continued to fall behind the
growth of the global economy, the British pound sterling and U.S. dollar became the
global reserve currencies. Smaller countries began holding more of these currencies
instead of gold. The result was an accentuated consolidation of gold into the hands
of a few large nations.

At the end of WWII, the U.S. had 75% of the world's monetary gold and the
dollar was the only currency still backed directly by gold. However, as the world
rebuilt itself after WWII, the U.S. saw its gold reserves steadily drop as money flowed
to war-torn nations and its own high demand for imports. The high inflationary
environment of the late 1960s sucked out the last bit of air from the gold standard.

The Gold Pool collapsed in 1968 as member nations were reluctant to

cooperate fully in maintaining the market price at the U.S. price of gold. In the
following years, both Belgium and the Netherlands cashed in dollars for gold, with
Germany and France expressing similar intentions. In August of 1971, Britain
requested to be paid in gold, forcing Nixon's hand and officially closing the gold
window. By 1976, it was official; the dollar would no longer be defined by gold, thus
marking the end of any semblance of a gold standard.

The Bretton Woods Agreement and System Explained

Approximately 730 delegates representing 44 countries met in Bretton Woods

in July 1944 with the principal goals of creating an efficient foreign exchange system,
preventing competitive devaluations of currencies, and promoting international
economic growth. The Bretton Woods Agreement and System were central to these
goals. The Bretton Woods Agreement also created two important organizations—the
International Monetary Fund (IMF) and the World Bank. While the Bretton Woods
System was dissolved in the 1970s, both the IMF and World Bank have remained
strong pillars for the exchange of international currencies.

Though the Bretton Woods conference itself took place over just three weeks,
the preparations for it had been going on for several years. The primary designers of
the Bretton Woods System were the famous British economist John Maynard
Keynes and American Chief International Economist of the U.S. Treasury
Department Harry Dexter White. Keynes’ hope was to establish a powerful global
central bank to be called the Clearing Union and issue a new international reserve
currency called the bancor. White’s plan envisioned a more modest lending fund and
a greater role for the U.S. dollar, rather than the creation of a new currency. In the
end, the adopted plan took ideas from both, leaning more toward White’s plan .

It wasn't until 1958 that the Bretton Woods System became fully functional.
Once implemented, its provisions called for the U.S. dollar to be pegged to the value
of gold. Moreover, all other currencies in the system were then pegged to the U.S.
dollar’s value. The exchange rate applied at the time set the price of gold at $35 an
ounce.

The Bretton Woods Agreement was negotiated in July 1944 to establish a

new international monetary system, the Bretton Woods System. The Agreement was
developed by delegates from 44 countries at the United Nations Monetary and
Financial Conference held in Bretton Woods, New Hampshire.

Under the Bretton Woods System, gold was the basis for the U.S. dollar and
other currencies were pegged to the U.S. dollar’s value. The Bretton Woods System
effectively came to an end in the early 1970s when President Richard M. Nixon
announced that the U.S. would no longer exchange gold for U.S. currency.

Benefits of Bretton Woods Currency Pegging

The Bretton Woods System included 44 countries. These countries were

brought together to help regulate and promote international trade across borders. As
with the benefits of all currency pegging regimes, currency pegs are expected to
provide currency stabilization for trade of goods and services as well as financing.

All of the countries in the Bretton Woods System agreed to a fixed peg
against the U.S. dollar with diversions of only 1% allowed. Countries were required
to monitor and maintain their currency pegs which they achieved primarily by using
their currency to buy or sell U.S. dollars as needed. The Bretton Woods System,
therefore, minimized international currency exchange rate volatility which helped
international trade relations. More stability in foreign currency exchange was also a
factor for the successful support of loans and grants internationally from the World
Bank.

The IMF and the World Bank

The Bretton Woods Agreement created two Bretton Woods Institutions, the
IMF and the World Bank. Formally introduced in December 1945 both institutions
have withstood the test of time, globally serving as important pillars for international
capital financing and trade activities.

The purpose of the IMF was to monitor exchange rates and identify nations
that needed global monetary support. The World Bank, initially called the
International Bank for Reconstruction and Development, was established to manage
funds available for providing assistance to countries that had been physically and
financially devastated by World War II. In the twenty-first century, the IMF has 189
member countries and still continues to support global monetary cooperation.
Tandemly, the World Bank helps to promote these efforts through its loans and
grants to governments.

What Is the International Monetary Fund?

The International Monetary Fund (IMF) is an international organization that aims to

promote global economic growth and financial stability, encourage international
trade, and reduce poverty.

The mission of the IMF is to promote global economic growth and financial stability,
encourage international trade, and reduce poverty around the world.

The IMF was originally created in 1945 as part of the Bretton Woods agreement,
which attempted to encourage international financial cooperation by introducing a
system of convertible currencies at fixed exchange rates.

The Bretton Woods System’s Collapse

In 1971, concerned that the U.S. gold supply was no longer adequate to cover the
number of dollars in circulation, President Richard M. Nixon declared a temporary
suspension of the dollar’s convertibility into gold. By 1973 the Bretton Woods System
had collapsed. Countries were then free to choose any exchange arrangement for
their currency, except pegging its value to the price of gold. They could, for example,
link its value to another country's currency, or a basket of currencies, or simply let it
float freely and allow market forces to determine its value relative to other countries'
currencies.

Monetary System

A monetary system is the set of institutions by which a government provides money

in a country's economy. Modern monetary systems usually consist of the national
treasury, the mint, the central banks and commercial banks.

Money

The money is assets in an economy that people regularly use to buy goods and
services from the other people. It also includes only those few types of wealth that
are regularly accepted by sellers in exchange for goods and services.

Types of money:

Commodity money- This type of money takes the form of commodity with intrinsic
value. Intrinsic money means that the item would have value even if it were not used
as money. One example of commodity money is gold.

Fiat money- A type of money without intrinsic value that is used as money because
of government decree.