Somehow we had a very controversial topic from conspiracy theory: From Medici to Rothschilds, but now we will talk about very real things.
72 years ago, on July 1, 1944, a fundamental change in the world economy began, recorded in agreements a few days later. However, the understanding of what happened came to ordinary people much later.
The world of finance has always been something of a mixture of balancing act with the magic of circus magicians. Most of its basic concepts are difficult to understand, not only by ear, but are completely arbitrary in nature. At the same time, finance is inextricably linked with money, and money has always been an instrument of power. It is not surprising that with their help, over the centuries, someone has constantly tried to take over the world.
For example, in July 1944, at the Mount Washington Hotel in the resort town of Bretton Woods (New Hampshire, USA), a group of gentlemen held a conference, which resulted in the eponymous global financial system, which marked America's final victory over its long-standing geopolitical world rival - Great Britain. The winner went to the rest of the world - or rather, almost the entire world, since the Soviet Union refused to join the new system. However, for the United States, too, it became only an intermediate step towards world financial hegemony, which America was able to achieve, but, apparently, it was not destined to stay on the Olympus.
Stages of a long journey
The transition from a subsistence economy to machine production, among other things, caused a large-scale increase in labor productivity, thereby forming a significant surplus of commodities that local markets could no longer absorb. This pushed the countries to expand foreign trade. For example, in 1800-1860, the average annual volume of Russian exports increased from 60 million to 230 million rubles, and imports - from 40 million to 210 million. But the Russian Empire did not occupy the first place in international trade. The leading positions were held by Great Britain, France, Germany and the USA.
Such a large-scale exchange of goods could no longer fit within the narrow framework of a subsistence economy and required the widespread use of a common denominator in the form of money. This also gave rise to the problem of comparing their value with each other, which ultimately led to the recognition of gold as the universal equivalent of value. Gold played the role of money for centuries, it was available to all "big players", it was traditionally minted from it. But something else was more important. International trade realized the need not only for a mechanism for predicting the value of money, but also the importance of the stability of the ratio of their value to each other.
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Using the pegging of national currencies to gold made it very easy to solve both problems at once. Your candy wrapper is "worth", let's say, one ounce (31.1 g) of gold, mine is two ounces, therefore, my candy wrapper is "equal" to two of yours. By 1867, this system was finally formed and was consolidated at the conference of industrialized countries in Paris. The leading world trading power of that time was Great Britain, therefore the stable exchange rate of 4.248 British pounds per ounce established by it became a kind of foundation of the world financial system. The rest of the currencies were also denominated in gold, but, yielding to the pound in terms of the share of world trade, ultimately came to be expressed in terms of the British pound.
However, even then, the United States began its own game of overthrowing the British currency hegemony. Within the framework of the Parisian monetary system, the United States achieved not only fixing the dollar against gold ($ 20.672 per ounce), but also fixed a rule according to which free trade in gold could only take place in two places: in London and New York. And nowhere else. This is how the gold mint parity was formed: 4.866 US dollars for the British pound. The exchange rates of other currencies had the right to fluctuate only within the framework of the cost of sending the amount of gold equivalent to one unit of foreign currency between the gold sites of the UK and the USA. If they went beyond the boundaries of this corridor, the outflow of gold from the country or, conversely, its inflow began, which was determined by the negative or positive balance of the national balance of payments. Thus, the system quickly returned to equilibrium.
In this form, the "gold standard" existed until the beginning of the First World War and, in general, ensured the effectiveness of the mechanism of international finance. Although even then Great Britain faced the problem of cyclical expansion-contraction of the money supply, fraught with depletion of the national gold reserve.
The Great War, as the First World War was then called, greatly shook the world economy, which could not but affect its financial system. London could no longer play the role of the world's reserve currency alone. The sheer scale of the domestic economy simply did not generate enough gold to support other countries' demand for British pounds, and Britain's own trade surplus remained negative. This meant the actual bankruptcy of the British lion, but the gentlemen from the City took a clever step and at the international economic conference in Genoa in 1922 proposed a new standard, which was called the gold exchange standard. Formally, it almost did not differ from the Parisian "gold", unless the dollar was already officially recognized as an international measure of value on a par with gold. Then a small fraud began. The dollar retained gold backing, and the pound remained tightly pegged to the dollar, although it was no longer possible to exchange it for the corresponding gold equivalent.
Conference in Genoa in 1922.
I will command the parade
However, the Genoese monetary system did not last long. Already in 1931, Great Britain was forced to officially cancel the convertibility of the pound into gold, and the Great Depression forced America to revise the gold content of its currency from $ 20.65 to $ 35 per ounce. The United States, which by that time had a positive trade balance, began an active expansion into Europe. To protect against it, Britain and other leading countries have introduced prohibitive customs tariffs and outright restrictions on imports. The volume of international trade and, accordingly, mutual settlements fell sharply. The exchange of currency for gold in all countries was discontinued, and by 1937 the world monetary system had ceased to exist.
Unfortunately, before her death, she managed to lead the US banking circles to the idea of the possibility of seizing complete leadership in the world economy through the dollar acquiring the status of the only reserve system. And the Second World War, which ravaged Europe, came in handy here. If Hitler was not there, he would have been invented in Washington.
So when on July 1, 1944, representatives of 44 countries, including the USSR, gathered at the Bretton Woods conference to resolve the issue of the financial structure of the post-war world, the United States proposed a system that was at the same time very similar to the one that "worked well before", and at the same time leading the world to the official recognition of America's leading role. In short, she looked simple and elegant. The US dollar is tightly pegged to gold (all the same $ 35 per troy ounce, or 0.88571 g per dollar). All other currencies fix rates against the dollar and can change them no more than plus or minus 0.75% of this value. Apart from the dollar and the pound, no world currency had the right to exchange for gold.
In fact, the dollar was becoming the world's only reserve currency. The British pound retained some privileged status, but by that time more than 70% of the world's gold reserves were in the United States (21,800 tons), the dollar was used in more than 60% of international trade transactions, and Washington promised huge loans in exchange for ratifying the Bretton Woods terms to restore the economies of countries after the war. So, the Soviet Union was offered to allocate 6 billion dollars, which was a huge amount, since the entire volume of lend-lease was estimated at 11 billion. However, Stalin correctly estimated the consequences and prudently refused the offer: the Soviet Union signed the Bretton Woods agreements, but they has not ratified.
The governments of other European countries actually signed a cabal and with the ratification of the Bretton Woods conditions could issue exactly as much of their own money as their central banks had the world reserve currency - American dollars. This provided the United States with the broadest opportunities to control the entire world economy. This also allowed them to establish the International Monetary Fund, the World Bank and GATT - the General Agreement on Tariffs and Trade, later transformed into the World Trade Organization (WTO).
The world began to live according to the Bretton Woods system (BWS).
Wall Street trading floor, USA, 1939.
As the external debt of Great Britain and the United States increased from year to year and soon exceeded the size of the gold reserves of these countries, and the governments of foreign countries became more and more convinced that, while maintaining the existing international monetary system, they were forced to finance the deficits of the United Kingdom and the United States (whose policy they could not control and at times did not agree with her), the two above conditions began to contradict each other.
The Bretton Woods system was well conceived but could only work effectively if the underlying reserve currency was stable. And this condition was not met in the end. In the 1960s, the US balance of payments was mostly negative, which meant that the amount of dollars in foreign hands increased rapidly as US gold reserves were depleted.
Throughout the 1960s, the dollar gradually lost its ability to exchange for gold, but the system of the contractual credit reserve standard allowed maintaining at least the appearance of the existence of a gold and foreign exchange standard. As a result, the United States for a long time managed to evade the need to eliminate the balance of payments deficit by changing domestic economic policy or the dollar exchange rate. Ultimately, however, when the US government instead of raising tax rates began to increase the money supply in order to pay the costs of the Vietnam War, the US experienced a surge in inflation. As the money supply grew, interest rates fell and domestic prices rose sharply, reducing the competitiveness of American goods overseas.
The first crisis broke out in October 1960, when the price of gold on the private market in a short time rose to $ 40 an ounce at the official price of $ 35 an ounce. This crisis was followed by the gold, dollar and sterling crises. Such a development of events could soon end with the collapse of the entire world monetary system, similar to the collapse of 1931, but in reality it led to an unprecedentedly close cooperation of all the leading states of the world in the monetary sphere and increased the willingness of countries with excess reserves to continue financing operations to save the monetary system in the period while there was a discussion of fundamental reforms.
Despite the growing income from foreign investment, the surplus of the US balance of payments on trade in goods and services (including income from foreign investment), transfers and pensions, which reached $ 7.5 billion in 1964, was replaced by a deficit of approx. 800 million dollars in 1971. In addition, the volume of capital exports from the United States all these years stably kept at the level of 1% of the gross national product; however, if at the end of the 1960s high interest rates in the country contributed to the inflow of approx. 24 billion dollars of foreign capital, then in the early 1970s, low rates caused a massive dumping of securities and an outflow of investment abroad.
French demarche
For all the elegance of its design and the enormous prospects for the United States, the BVS itself contained fundamental problems that had manifested themselves back in the days of the "gold standard". While the US economy was about a third of the world, and if we subtract the socialist countries, then 60% of the total Western economy, the share of dollars issued for lending to foreign financial systems was significantly less than the money supply circulating within the United States itself. The balance of payments was positive, thus enabling America to continue to get rich. But as the European economy recovered, the share of the United States began to decline, and American capital, taking advantage of the high cost of the dollar, began to actively flow abroad to buy cheap foreign assets. In addition, the profitability of foreign investments was three times higher than the profitability of the American market,which further stimulated the outflow of capital from the United States. America's trade balance gradually turned negative.
The strict restrictions on gold trading that existed in the BVS did not help either, which actually limited its acquisition even by the central banks of other states, and deprived any private investors altogether of such an opportunity. In addition, the emerging transnational corporations used their foreign capital for an active exchange game, including against the dollar. The sharpening imbalance between the theoretical model of the BVS and the actual state of affairs in the world economy led not only to the emergence of the black market for gold, but also brought its price there to more than $ 60 per troy ounce, that is, twice as high as the official one.
It is clear that such a discrepancy could not last long. It is believed that the BVS was broken by French President General de Gaulle, who collected the "ship of dollars" and presented it to the United States for immediate exchange for gold. This story did take place. At a meeting with President Lyndon Johnson in 1965, de Gaulle announced that France had accumulated $ 1.5 billion in paper dollars, which it intends to exchange for the yellow metal at the official rate of $ 35 an ounce. According to the rules, the USA had to transfer more than 1,300 tons of gold to the French. Considering that by this time no one knew the exact size of the US gold reserve, but there were persistent rumors about its reduction to 9 thousand tons, and the cost of the entire mass of printed dollars clearly exceeded the equivalent of even the official number of 21 thousand tons, America would agree to such an exchange I could not. Nevertheless, France, through tough pressure (for example, the country withdrew from the NATO military organization) managed to overcome the resistance of Washington and in two years, together with Germany, thus took out more than 3 thousand tons of gold from the United States.
The US's ability to keep the dollar convertible into gold was becoming impossible. By the beginning of the 70s. there was a redistribution of gold reserves in favor of Europe, and more and more cash and non-cash US dollars participated in international circulation. Confidence in the dollar as a reserve currency was further diminished by the gigantic US balance of payments deficit. The US deficit in terms of official payments reached an unprecedented size - $ 10.7 billion in 1970 and $ 30.5 billion in 1971, with a maximum of $ 49.5 billion (year-on-year) in the third quarter of 1971.
Significant problems with international liquidity arose as gold production was low compared to the growth in international trade. New financial centers (Western Europe, Japan) were formed, and their national currencies began to gradually be used as reserve ones. This led to the loss of the United States of its absolute dominant position in the financial world.
In accordance with the rules of the IMF, the resulting surplus of dollars in the private foreign exchange market had to be absorbed by foreign central banks, which was required to maintain the existing currency parities. However, such actions gave rise to expectations of a depreciation of the dollar against the stronger currencies of countries that have accumulated huge dollar claims, in particular France, West Germany and Japan. These expectations were reinforced by the official statements of the US government that it considers changes in exchange rates as a measure necessary to restore the balance of payments and the competitiveness of American goods in foreign markets. On August 15, 1971, the United States officially announced the suspension of the exchange of dollars for gold. At the same time, to strengthen its position in the upcoming negotiations, the United States introduced a temporary 10% premium to import duties. The introduction of the premium had two purposes: to restrict imports by making them more expensive, and to warn foreign governments that if they did not take drastic steps to boost US exports, their own exports to the US would be sharply limited.
This is where the story of the Bretton Woods financial system ended, since after such an embarrassment, the United States, under various pretexts, refused to exchange green papers for real gold. On August 15, 1971, the next US President, Richard Nixon, formally canceled the gold backing of the dollar.
Over the 27 years of its existence, BVS has done the main thing - it has raised the American dollar to the top of world finance and has firmly associated it with the concept of independent value. That is, the value of this piece of paper was given only by what is written on it - "dollar" - and not the amount of gold for which it could be exchanged. The rejection of gold backing lifted the last restrictions on the issue of money from the United States. Now the FRS could officially decide at its meeting how many dollars the world needs, without worrying about any kind of security.
Smithsonian Agreement
After the August 15 announcements, those countries with positive balance of payments, which had not yet switched to floating rates of their currencies, were forced to do so. However, the governing monetary institutions of these countries have tried to limit the appreciation of their currencies and thus maintain the competitiveness of their products in international markets. At the same time, governments were keen to avoid a return to the destructive protectionist policies that prevailed in the world in 1931 after the termination of the exchange of pounds for gold and could again become dominant now that the exchange of dollars for gold has ceased. The danger of a return to the past was eliminated with the help of agreements reached on December 18, 1971 at negotiations between representatives of the G-10 countries at the Smithsonian Institution (Washington).
First, the terms of the multilateral revision of exchange rates were agreed, which entailed a devaluation of the US dollar against gold by 7.89% and a simultaneous increase in the exchange rates of many other countries. As a result, the value of the world's leading currencies increased by 7-19% relative to the previous dollar parity. Until early 1972, many other countries did not change their IMF-fixed currency parities; as a consequence, the value of their currencies against the dollar also automatically rose. Some countries have resorted to adjusting the parity of their currencies to maintain their previous exchange rate against the dollar, while others have increased or decreased their national currencies against the dollar. Secondly, the G10 agreed to temporarily set the limits of permissible fluctuations in exchange rates at 2.25% of the new exchange rate, which so far excluded free floating of currencies. Finally,third, the United States agreed to remove the 10 percent premium on import duties.
As a result of the measures taken, the gold and foreign exchange standard was transformed into a paper-dollar standard, in which all countries, with the exception of the United States, assumed risky obligations to maintain the new exchange rates, which were actually enshrined in the Smithsonian Agreement.
Jamaican system
Supporters of monetarism advocated market regulation against government intervention, revived the idea of automatic self-regulation of the balance of payments, and proposed introducing a floating exchange rate regime (M. Fridman, F. Makhlup, and others). The neo-Keynesians turned to the previously rejected idea of J. M. Keynes about the creation of an international currency (R. Triffin, W. Martin, A. Day. F. Peru, J. Denise). The US has embarked on a course towards the final demonetization of gold and the creation of international liquidity to support the dollar. Western Europe, especially France, has sought to limit dollar hegemony and expand IMF lending.
The search for a way out of the financial crisis was conducted for a long time, first in academic circles, and then in ruling circles and numerous committees. The IMF prepared in 1972-1974. the project for the reform of the world monetary system.
Its device was officially agreed at the IMF conference in Kingston (Jamaica) in January 1976 by the agreement of the IMF member countries. The Jamaican system is based on the principle of complete rejection of the gold standard. The reasons for the crisis are described in the article Bretton Woods Monetary System. The rules and principles of regulation were finally formed by 1978, when the amendment to the IMF charter was ratified by a majority vote. Thus, the current world monetary system was created.
According to the plan, the Jamaican monetary system was to become more flexible than the Bretton Woods one, and to adapt more quickly to the volatility of balances of payments and national currencies. However, despite the approval of floating exchange rates, the dollar, formally deprived of the status of the main means of payment, actually remained in this role, which is due to the more powerful economic, scientific, technical and military potential of the United States in comparison with other countries.
In addition, the chronic weakness of the dollar, characteristic of the 1970s, was replaced by a sharp increase in its exchange rate by almost 2/3 from August 1980 to March 1985, under the influence of a number of factors.
The introduction of floating exchange rates instead of fixed exchange rates in most countries (since March 1973) did not ensure their stability, despite the enormous costs of foreign exchange intervention. This regime proved to be incapable of ensuring rapid equalization of balances of payments and inflation rates in various countries, ending with sudden capital movements, speculation in exchange rates, etc.
A number of countries continued to peg their national currencies to other currencies: dollar, pound, etc., some pegged their rates to “currency baskets”, or SDRs.
One of the basic principles of the Jamaican World Monetary System was the legally completed demoneetarization of gold. Gold parities were abolished, and the exchange of dollars for gold was stopped.
The Jamaican Agreement finally abolished the gold parities of the national currencies, as well as the SDR units. Therefore, it was viewed in the West as the official demonetization of gold, depriving it of any monetary functions in the sphere of international circulation. The beginning of the actual ousting of the "yellow metal" from international monetary relations was laid.
Formally, the Jamaican system exists to this day, but in fact we can see the beginning of its end. Because it contains even more systemic contradictions than there was in Bretton Woods, but there is no longer gold in it, which can at least be felt and counted.