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
SYMBOLISM OF WIZARD OF OZ CHARACTERS :
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
www.sharpspixley.com