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40 Years Since Bretton Woods - A Gold Perspective

Monday marks 40 years since the end of the Bretton Woods agreement and indeed the end of the gold standard. Bretton Woods had been a financial discipline put in place to prevent Central Bankers expanding the monetary supply in an irresponsible way and to introduce fiscal discipline. For those that believe in the power of happy coincidences the answer to current financial issues might just lie in the number "40". I'll explain.

The Bretton Woods system collapsed exactly 40 years ago under the weight of US trade deficits and the cost of funding the Vietnam War which meant that gold and international currencies were freely floated.  It was to be the birth of fiat currencies (Latin for "let it be done" - in other words its value is decreed by government) and it ushered in (initially) an era of unprecedented prosperity. Ironically fiat currencies have a long history and had originated in China in the 11th Century during the Song Dynasty (they cannot say that they were not warned) but it died during a period of hyperinflation, something that fiat currencies have had a tendency to do.

A 40th anniversary is referred to as a "Ruby Anniversary" and in act of irony we may find the answer to our current economic woes in another "ruby" - that is 'ruby shoes' in the Wizard of Oz - thought to be a monetary allegory for the gold standard. More of that in a moment - you will need to wait for the punchline.

In 1944 at the outset of Bretton Woods the US held 60% of global gold reserves.The US dollar was pegged to all currencies at a fixed exchange rate and gold was fixed at a price of $35/oz or ounce and redeemable by holders of dollars at that price. The Federal Reserve were thus constrained from expanding their monetary base without buying more gold - it placed financial constraints on Central Bankers. This artificial construct came under pressure and a number of governments - especially De Gaulle of France but also later Germany and Switzerland redeemed their dollars for gold with the Federal Reserve.

Over the 1944 to 1971 period of Bretton Woods, gold coverage for dollars printed by the Federal Reserve had fallen progressively from 55% to 22%. The US was in difficulty and on August 15th 1971 (the so-called Nixon Shock) President Nixon unilaterally decided without consultation with Congress to impose a wage freeze, a 10% duty on imports and 'closed the gold window' ending convertibility. The Nixon Shock succeeded in liberating global economies and markets flourished - for a while.

The Wizard of Oz was published in 1900 by L. Frank Baum (a keen political writer and Populist) and released as a film in 1939. In the original book Dorothy's shoes were silver but changed to ruby because Hollywood was going technicolour  The Populist Movement of 1894 had wanted silver (at a fixed ratio of 16:1), along with gold, to be used as the backing for US dollars, thereby creating more dollars, thus devaluing dollars and therefore reducing the debt burdens that workers (and especially farmers) were laboring under. A form of 'Quantitative Easing' if you like.

There is no solid evidence to support the view that the book was intended as a political satire or even a monetary allegory, but it does nevertheless serve a didactic purpose.

The interpretation of the film is clear. Dorothy (Everyman American) is lost in a (financial) storm. She is joined in her endeavours to find a solution by the Scarecrow (farmers), Tin Man (industrial workers) and Lion (pro-silver politicians). The Yellow Brick Road (gold standard) takes her some of the way there. However it leads to the Emerald City (fiat currency) with its false tricks and delusions. The answer to financial salvation lies in her ruby (silver) shoes. Of course the Wizard (President) was a fraud, his gifts were shallow and much of what he said was fantasy. The message is clear at its simplest level - we have the power within us by clicking our heels to make the changes we need. At a deeper level it seems urges a move beyond the constraints of a gold standard to make the economic changes necessary for growth.. in this case silver.

Bretton Woods was devised precisely to prevent the sort of economic conditions that we suffer today. Excessive leverage and politicians who lack the courage to give us what we need, rather than what we want. This was safety net was abandoned 40 years ago. The solution to today's problems is not, in my opinion to head back down the yellow brick road and reintroduce a gold standard, although it might play a role the solution. The gold market is insufficiently large to sensibly play that role by itself.

In 1942 JM Keynes conceptualized and the UK proposed that the IMF introduce the "Bancor", a supranational international currency used for trade and exchanged by barter. It could play a parallel role as the global reserve currency and it would be backed in part by gold and other hard commodities. In 2008 the governor of the People's Bank of China has suggested Special Drawing Rights at the IMF as an alternative solution.

Whatever the solution - Bancor (backed by gold), SDR's or even silver slippers - the time has come to put global reserve assets on the IMF agenda. The US dollar suffers from the Triffin Dilemma where short term domestic issues with regards to their national currency runs in conflict with longer term international concerns.
This needs to change.

Ross Norman
Sharps Pixley, London-Based Bullion Brokers


Dorothy: Everyman American - wholesome, plucky and levelheaded
Yellow Brick Road : The Gold Standard
Dorothy's Ruby Shoes : Originally these were silver and represented a silver standard
Scarecrow: Farm Workers unsure what to do or with no 'brain'
Tin Man: Dehumanized Industrial workers in rusting Plants with no 'heart'
Lion: Politicians who backed silver cause, maybe William Jennings Bryan but little 'courage'
Toto : The dog is a play on the word "teetotaler" - many Populists were also Prohibitionists
Wizard of Oz: US president of late 19th Century
Oz: An abbreviation of 'ounce' - the standard weight measure for gold
Wicked Witch of The West : Oilmen and Railroad Barons
Wicked Witch of The East : Bankers
Good Witch Glinda of the South : Populists have good support in the South
Winged Monkeys: Native Americans or Chinese railroad workers, exploited by West
Emerald City: Greenback paper money, exposed as fraud or Washington
Munchkins: Ordinary citizens

Ross Norman
Sharps Pixley, London