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Gold Exchange Standard in Its 40Th Year of Abolition

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Gold Exchange Standard in Its 40Th Year of Abolition POLICY BRIEF GLOBAL POLITICAL TRENDS CENTER (GPoT) GOLD EXCHANGE STANDARD IN ITS 40 TH YEAR OF ABOLITION: JACQUES RUEFF RE-VISITED ONUR BAYRAMOĞLU October 2011 | GPoT PB no. 28 ABSTRACT While the post-war international monetary system that evolved under the leadership of the U.S. dollar has secured credit abundance – and hence contributed to global growth – the system has also revealed its deficiencies already by 1950’s. In contrary to the 1930’s when the world’s main problem was chronic deflation; two decades later, the problem has become chronic inflation and fiscal deficits. Since then many blamed the indiscipline of the Keynesian school of thought and the inability of the U.S. dollar to become a global “public good” by being a stable international currency. In this Policy Brief, I overview the many aspects of the post-war international monetary system through the lens of the post-war French economist, Jacques Rueff, and question the applicability of his long- proposed gold standard in today’s highly integrated and speculative money markets. international monetary system began back Introduction in the 1960’s, the unilateral abolishment of the convertibility of the U.S. dollar to On August 15 th 1971, the U.S. President gold in 1971 intensified opposing argu- Richard Nixon abolished the direct ments towards the current monetary convertibility of the U.S. dollar to gold, system. Many thought that the system which ended the gold exchange standard that established the U.S. dollar as the of the Bretton Woods system. Since then, world’s reserve currency did not provide a the U.S. dollar, without any real back up, global “public good” that secured a stable became the global fiat money, dropping world currency and this fact, they argued, gold’s long-run legacy as the world’s led to boom and bust cycles in the global reserve currency. Though the debate economy. about the role of the U.S. dollar within the GLOBAL POLITICAL TRENDS CENTER (GPoT) 2 GOLD EXCHANGE STANDARD IN ITS 40 TH YEAR OF ABOLITION: JACQUES RUEFF RE-VISITED ONUR BAYRAMOĞLU In about every 18 months, the global to inflation, global imbalances, and fiscal economy experiences some sort of a deficits. In the second section, I put monetary convulsion. Such experiences, forward the ideas of some of the most during the last 10 years, were felt in influential post-war thinkers such as different parts of the world that included Keynes and Hayek who widely influenced Latin America and most of Asia. One of the monetary system. In this section, I also the core ideas was that the Fed created bring out the ideas of Jacques Rueff – the credit was responsible for protagonist of the brief – the boom and bust cycles in explaining how he consti- ...today’s world money the global economy that led tuted a middle way between markets are being to financial bubbles in Keynes and Hayek but was operated by traders who different parts of the world. generally disregarded during move billions of dollars the post-war economic worth of monetary assets Today, we are living in a structuring period. In the around the globe without world where capital controls third section, I analyze the much structured have been dismantled in alternatives to Dollar – overseeing by most countries; a move that namely Euro and Yuan – governments. deeply affected national where I reveal the incapa- equity and bond markets bility of these currencies to through rapid flows of foreign money. be the world’s reserve currency. After Referred to as “Casino Capitalism”, today’s analyzing Dollar, Euro, and Yuan, in the world money markets are being operated fourth section, I question the applicability by traders who move billions of dollars of a return to the gold standard in today’s worth of monetary assets around the highly integrated global economy in globe without much structured overseeing reference to Jacques Rueff who had put by governments. This system also brings forward this idea more than 50 years ago. along currency speculations, giving way to I then conclude in the fifth section by massive destructions. As the dollar based arguing that the gold standard, in today’s monetary system is volatile and vulnerable global economy, could only be applicable to substantial shifts in exchange rates, a through the strengthening of multilateral lot of international firms choose to hedge. global governance. This can be considered as a part of the cost they must incur for operating in a global economy without a stable exchange The History of the Post-War Inter- rate. national Monetary System In this Policy Brief, I investigate the post- Even by the early 1950’s, the postwar war Bretton Woods monetary system world had begun to fulfill Roosevelt’s through historical, political, economical, dreams of Pax-Americana. American philosophical, and structural perspectives, statesmen – imposing liberal Wilsonian va- and analyze the positive and negative lues – had reconstituted a global political aspects of a potential alternative – i.e. the economy, in which Europe and Japan had gold standard. In the first section of the once again become the centers of brief, I recount a short history of the post- commerce and finance. Many developing war international monetary system, nations in Asia and Latin America had also explaining how dollar based growth started to benefit from the abundance of around the globe evolved in a way that led capital and liberal trade regime within this GLOBAL POLITICAL TRENDS CENTER (GPoT) 3 GOLD EXCHANGE STANDARD IN ITS 40 TH YEAR OF ABOLITION: JACQUES RUEFF RE-VISITED ONUR BAYRAMOĞLU system. The newly created system re- discipline of the gold standard. On the quired the U.S. to continuously incur fiscal other hand, under the gold exchange deficits so that global growth could be standard, the U.S. – as the issuer of the secured. The postwar U.S. governments world’s reserve currency – could instead were pressed to fulfill the simultaneous finance its deficits by spreading inflation demands for more arms and welfare, and to the rest of the world. for more public and private investment and consumption, which were all covered While in the 1930’s the main problem of by fiscal deficits and easy money. the world economy was chronic deflation; two decades later, it became chronic Under the Bretton Woods monetary inflation. During most of the 1950’s, the system, the key element of this new Eisenhower Administration struggled with regime was the U.S. dollar. The gold the inflationary tendencies generated by standard was already abolished during the huge jumps in the U.S. military outlays interwar years, and the new Bretton initiated by the Korean War. Additionally, Woods system had brought along the neo-Keynesian fiscal doctrines, popula- gold-exchange standard under which the rized to rationalize a tax cut in 1964 could U.S. dollar was established as world’s the be summoned to justify federal deficits reserve currency – replacing the previous under almost any circumstances. Inflation Sterling in line with the Britain’s declining and the worsening balance of payments role in world politics. Accordingly, the were the natural consequences. dollar was fixed to gold at a rate of 35 USD per ounce, and all other world currencies Although the flood of expatriate dollars were tied to the U.S. dollar. The was welcomed in the late 1940’s and experiences of the Great Depression that 1950’s – when Europe’s growth and pros- erupted in 1929 were key during the perity depended heavily on American structuring of the Bretton Woods system. credit – by the 1960’s, the Bretton Woods During the 1930’s, the main challenge that system and the international role of the the global economy faced was deflation dollar started to become an issue between and the scarcity of capital. Within this the U.S. and the other actors of the global perspective, what worried the Americans economy, which first and foremost about the Gold Standard included the Europeans. French President, Charles de system was that not only a While in the 1930’s the Gaulle, in a press conference great amount of the world’s main problem of the in 1965, criticized the gold reserves were stocked world economy was international role of the in the Soviet Russia and chronic deflation; two dollar, saying that the U.S. South Africa, but also that decades later, it became and the U.S dollar had an the amount of gold was not chronic inflation. large enough to secure a “exorbitant privilege” that world economy that could no other country previously operate under a liberal trade regime. had. General de Gaulle argued that Moreover, as the principles of Keynesian because the Bretton Woods made the school of thought would confirm, a U.S. dollar the indispensible reserve currency, economy that operates under fiscal Americans could print their money at will deficits would also trigger inflation – and the rest of the world would have to go which in turn would diminish the U.S. gold on accepting it due to international reserves as would be required under the settlements. Having regarded the situation GLOBAL POLITICAL TRENDS CENTER (GPoT) 4 GOLD EXCHANGE STANDARD IN ITS 40 TH YEAR OF ABOLITION: JACQUES RUEFF RE-VISITED ONUR BAYRAMOĞLU as economically unfair and politically globe. Similarly, the 2008 global economic abusive under the Bretton Woods system, crisis can also be attributed to such a loss the U.S. was able to “export inflation” to of confidence among the investors. Europe without any consideration. For de Gaulle, the only solution to prevent such Despite Rueff’s, and in general France’s, an outcome was going back to the gold efforts to make radical changes within the standard.
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