The Gold Exchange and the Brett on Woods Agreement
In 1967,a Chicago bank refused a college professor by the name of Milton Friedman a loan in pound sterling because he had intended to use the funds to short the British currency.Friedman,who had perceived sterling to be priced too high against the dollar,wanted to sell the currency,then later buy it back to repay the bank after the currency declined,thus pocketing a quick profit.The bank's refusal to grant the loan was due to the Brett on woods Agreement,established twenty years earlier,which foxed nation currencies against the dollar,and set the dollar at a rate of $35 per ounce of gold.
The Bretton woods Agreement,set up in 1944,aimed at installing international monetary stability by preventing money from fleeing across nations,and restricting speculation in the world currencies.prior to the Agreement,the gold exchange standard--prevailing between 1876 and world war I--dominated the international economic system.under the gold exchange,currencies gained a new phase of stability as they were backed by the price of gold.It abolished the age-old practice used by kings and rulers of arbitrarily debasing money and triggering inflation.
But the gold exchange standard did not lack faults.As an economy strengthened,it would import heavily from abroad until it ran down its gold reserves required to back its money; consequently,the money supply would shrink,interest rates rose and economic activity slowed to the extent of recession.Ultimately,prices of goods had hit bottom,appearing attractive to other nations,who would rush into buying sprees that injected the economy with gold until it increased its money supply,and drive down interest and recreate wealth into the economy,Such boom bust patterns prevailed throughout the gold standard until the outbreak of World War I interrupted trade flows and the free movement of gold.
After the wars,the Bretton Woods Agreement was founded,where participating countries agreed to try and maintain the value of their currency with a narrow margin against the dollar and a corresponding rate of gold as needed.Countries were prohibited from devaluing their currencies to their trade advavtage and were only allowed to do so for devaluations of less than 10%.Into the 1950s,the ever-expanding volume of international trade led to massive massive movements of capital generated by post-war construcation.That destabilized foreign exchange rates as setup in Bretton Woods.
The Agreements was finally abandoned in 1971,and the US dollar would no longer be convertible into gold.By 1973, currencies of major industrialozed nations floated more freely,as they were controlled mainly by the forces of supply and demand.Prices were floated daily,giving rise to new financial instruments,market deregulation and trade.
In the 1980s, cross-border capital movements accelerated with the advent of computers and technology,extending market continuum through Asian,European and American time zones.Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more then $1.5 trillion a day two decades later.
No comments:
Post a Comment